Corporatefinanceinstitute com 1 The Corporate Finance Institute Accounting For more eBooks please visit

Land
Building
Equipment
Land purchase cost
Building purchase cost
Equipment purchase cost
Legal fees
Construction permit
Installation costs
Property transfer tax
Architectural design costs
Testing costs
Demolition of old structures
Construction costs
Equipment specific training costs
Soil decontamination costs
Engineer survey costs
Transportation & delivery costs

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corporatefinanceinstitute.com
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The Corporate Finance Institute
Accounting
Asset Retirement Obligations
ARO costs incurred by companies to restore a site to its original state 
and clean up for any damage may be quite significant and, thus, are 
capitalized to the cost of the asset. In order to determine the amount to 
be capitalized, companies must calculate the present value of the costs 
they expect to incur when the asset needs to be removed in the future. 
For example, if a company were to build a 10-year oil drilling platform 
that costs $10,000,000 with an estimated future dismantling cost of 
$450,000, the company needs to record a journal entry for the present 
value of the future dismantling costs. So, the company first records an 
ARO liability, which is capitalized to the asset and the liability is then 
amortized every year that the oil platform is used. Assuming a market 
interest rate of 5%, the present value of the dismantling costs would be:
Purchase of Oil Platform Journal Entry:
DR Oil Platform
: 10,000,000
CR Cash:
10,000,000
ARO Journal Entry:
DR Oil Platform:
276,261
CR ARO Liability:
276,261
Finally, just like how the ARO liability is amortized every year, 
depreciation expense must also be recorded every year for the oil 
platform, depending on the method the company chooses to use. Learn 
more about the different methods of deprecation on the link below. 
PV
276,261
=
=
450,000
(1.05)
10

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