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Your client, Hazelton Mining, recently entered into an agreement to obtain the rights to operate a coal mine in West Virginia for $15 million. Hazelton incurred development costs of $6 million in preparing the mine for extraction, which began on July 1, 2006. The contract requires Hazelton to restore the land and surrounding area to its original condition after extraction is complete in three years.

The company controller, Alice Cushing, is not sure how to account for the restoration costs and has asked your advice. Alice is aware of a recent accounting pronouncement addressing this issue, but is not sure of its provisions. She has narrowed down the possible cash outflows for the restoration costs to four possibilities:

Cash Outflow	Probability
$3 million	20%
$4 million	30%
$5 million	25%
$6 million	25%

Alice also informs you that the company's credit-adjusted risk-free interest rate is 9%. Before responding to Alice, you need to research the issue.

Required:

Obtain the original FASB Standard on accounting for asset retirement obligations. You might gain access through FARS, the FASB Financial Accounting Research System, from your school library, or some other source. Explain the basic treatment of asset retirement obligations.

Determine the capitalized cost of the coal mine.

Prepare a summary journal entry to record the acquisition costs of the mine.

How much accretion expense will the company record in its income statement for the fiscal year 2006, related to this transaction?

Explain to Alice how Hazelton would account for the restoration if the restoration costs differed from the recorded liability in three years. By way of explanation, prepare the journal entry to record the payment of the retirement obligation in three years assuming that the actual restoration costs were $4.7 million.

Describe to Alice the necessary disclosure requirements for the obligation.

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