On January 1 of the current year, ListenUp Telecommunication invested idle cash of $ 12,500,000 in transmission towers and $ 9,000,000 in poles and lines to improve service to its customers. ListenUp is responsible for dismantling and removing the towers, poles, and lines at the end of their useful lives under each city’s and town’s removal and restoration requirements. The towers have a 10- year useful life and the poles and lines have a 15- year useful life. ListenUp uses the straight- line method for depreciation with no residual value expected at the end of the useful lives of the assets. ListenUp estimates the cost to dismantle and restore property related to the towers of $ 950,000.
Even though the poles and line method of transmission has been used for many years, ListenUp is install-ing these in numerous cities and towns. Recently, cities and towns have been increasing their standards for removal and restoration. Therefore, the costs to remove and restore the poles and lines do not have a reasonably determinable quoted market price and market comparables are not available. As a result,­ListenUp decided to use a probability- based estimate. The probability- based estimate employs the expected cash flows needed for the costs of dismantling and removal in today’s market. The estimated values are as follows:
Estimated Future Cash Flows Probability of Occurrence
$ 50,500………………………………………………5%
$ 350,000…………………………………………… 35%
$ 790,000 …………………………………………….40%
$ 985,000 …………………………………………… 20%
The company’s estimated cost of capital is 5%.
Required
a. Prepare the journal entries required to record the acquisition of each asset.
b. Prepare the journal entry to record the first and second year’s depreciation and accretion accrual for each asset.
c. What is the carrying value of each asset at the end of the second year? What is the carrying value of the ARO at the end of the second year?