Determine the amount of future abandonment obligation and discount it to the current present value, combine the present value with the acquisition cost of the fixed assets to the original value of the fixed assets and depreciate it together with the fixed assets.
Example: Fixed asset acquisition cost is $100,000, and the abandonment cost after 10 years is 10,794.60.
At an interest rate of 8%, calculate the present value PV(I/Y=10,8%,PMT=0,FV=-10,794.60)=5,000
Borrow: Fixed Assets 105,000
Credit: Bank Deposit 100,000
Projected Liability - Abandonment Expense 5,000
2. Calculate the accrued interest for each period
After acquiring a fixed asset with an abandonment obligation, you need to withdraw interest expense every year. Continuing with the above example, the accrued interest expense to be withdrawn at the end of each year is the projected liability's opening book value multiplied by the interest rate.
As in the above example, the interest expense at the end of the first year is 5,000 × 8% = 400, the entry is as follows:
Borrow: finance costs - interest 400
Credit: projected liabilities - disposal costs 400
At the end of the second year, the cumulative amount of the disposal costs account is 5,000 +400 = 5,400, and the accrued interest expense is 5,400 x 8% = 432
Borrow: Finance Charge-Interest 432
Credit: Estimated Liability-Discard Expense 432
And so on until the end of the 10th year.
3. Accounting for abandonment costs when they are actually incurred
Borrow: projected liability-abandonment costs 10,794.60
Credit: bank deposits 10,794.60