Trucks-N-Tanks Inc., was given a 16-year zero cost lease of land in Montana by the state government. The company had planned to set up a facility to manufacture tanks, armored trucks and various other military equipment. The plant was built and began operations on January 1, 2001. ITNT uses a December 31 year end, and and has adopted ASPE. After 16 years, (i.e., January 1, 2017), the Montana government mandates that ITNT dismantle the plant, clean up all residual waste material and restore the site to its initial natural condition.

You note that the land was leased from the provincial government without cost while the plant and equipment cost $2.4 million. Restoration costs in 16 years are expected to total $650,000, of which $400,000 , caused due to the usage of the plant, is to be recorded equally over the 16 years (and is to be recognized at the end of each year). The balance amount of $250,000 was to be recognized initially when the plant was acquired. The company now applies ASPE and has been using an annual interest rate of 5%. All assets are depreciated using the straight-line method.

1)

The appropriate journal entry to be prepared as at December 31, 2001, to record the additional restoration costs caused by the production process would be:

a. DR Manufacturing Overhead (or Inventory) ..... $12,026; CR ARO ..... $12,026

b. DR Plant and Equipment ..... $25,000; CR ARO ..... $25,000

c. DR Plant and Equipment ..... $12,026; CR ARO ..... $12,026

d. DR Plant and Equipment ..... $12,026; CR Cash ..... $12,026

e. None of the above.

2)

What was the amount of interest expense recorded in 2002?

a.$120,000

b.$6,614

c.$5,726

d.$125,726

e. None of the above.

3)

Determine the amount of Depreciation Expense which ITNT would record in its books for 2002

a.$190,625

b.$175,000

c.$150,000

d.$157,960

e. None of the above.

Answer rating: 100% (QA)

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