Question

If a company incurs legal obligations associated with the retirement of a tangible long-lived asset as a result of acquiring the asset:
a. The company recognizes the obligation at fair value when the asset is acquired.
b. The company recognizes the obligation at fair value when the asset is retired.
c. The company records the difference between the fair value of the asset and the obligation when the asset is acquired.
d. None of these answer choices are correct.

Answer 1

The company should recognize the obligation at the fair value at the time when the asset is acquired in case it incurs legal obligations.

Answer: Option A.

Explanation:

Legal obligation is the duty to be performed by the company related to the premises or the use of an asset for the production of goods.

For the legal obligation which is related with the retirement of an asset, the fair value of the asset is to be calculated which is the market price of that asset. This value is recognized at the time when the asset was acquired by the company.