# ARO related expense

A company expects to use a landfill site for 10 years at the end of which it will have to cap and close the landfill at an expected cost of \$2.8 million. Given that the effective interest rate is 8%, the company’s total ARO related expenses in Year 2 are closest to: A. \$250,714 B. \$121,020 C. \$224,776 Answer: A. Present value of liability= \$1,296,941 Depreciation= \$1,296,941/10 = \$129,694 Carrying value of liability in Year 2= \$1,400,697 Accretion Expense in Year 2= \$112,055 Can someone explain why they used \$121,020 instead of \$112,055?

This is definitely an error. Accretion expense for year 2 is coming \$112,055 and total ARO related expenses are coming \$241,750. They have taken accretion expense for year 3 which is \$121,020 in their calculation which would be wrong.

I dont know but when they say, the answer is closest to… maybe they are giving a margin of error… dunno

SpyAli Wrote: ------------------------------------------------------- > This is definitely an error. Accretion expense for > year 2 is coming \$112,055 and total ARO related > expenses are coming \$241,750. > > They have taken accretion expense for year 3 which > is \$121,020 in their calculation which would be > wrong. Thanks Ali that’s what I figured. I guessed A only because the “correct” answer wasn’t an option.

Np!

Where is this question from?

ARO calculations are not tested in the exam

not tested?

yes. we are not required to do ARO calculations on exam (LOS 37g), but we need to know the accounting for AROs and its impact on financial statements.