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Worked-example setupScope and assumptions
- Linden Peak Instruments is fictional; the legal obligation, settlement scenarios, probabilities, timing, rate, resource costs, residual, reserve units, extraction, and sales are supplied.
- The two retirement cash-flow scenarios are mutually exclusive and exhaustive for the bounded exercise.
- The initial asset retirement cost belongs in the depletable base; specialized extractive guidance, revisions, settlement differences, income taxes, and impairment are excluded.
- All extracted units are homogeneous, and beginning extracted-goods inventory is zero.
- Period
- Initial recognition followed by one year of accretion and current-year extraction and sale
- Units
- US dollars, resource units, years, probabilities, and a decimal annual rate
- Rounding
- Expected values retain machine precision; learner-facing dollars display to cents and rates to six decimal places
Recognition is supplied before measurement
The exercise stipulates that a law and the acquisition event create a legal retirement obligation. That premise is not inferred from Linden Peak's closure plan. Two mutually exclusive settlement scenarios are supplied:
| Scenario | Cash flow in five years | Probability | Weighted cash flow |
|---|---|---|---|
| Base | $400,000.00 | 70.00% | $280,000.00 |
| High | 520,000.00 | 30.00% | 156,000.00 |
| Total | 100.00% | $436,000.00 |
Discounting $436,000 for five years at the supplied 6% rate produces an initial obligation of $325,804.56. Linden Peak debits the resource asset and credits the ARO for the same amount. This does not mean eventual cash will equal the initial present value.
Add the retirement cost before computing depletion
Mineral rights and development cost total $1,600,000. The depletable base is:
$1,600,000.00 resource costs
+ 325,804.56 asset retirement cost
− 100,000.00 residual value
= $1,825,804.56 depletable base
With 900,000 supplied recoverable units, the rate is $2.028672 per unit.
Extraction is not the same event as sale
Linden Peak extracts 120,000 units, assigning $243,440.61 of depletion. It sells 95,000 units, so 25,000 remain in inventory:
| Destination | Units | Assigned depletion |
|---|---|---|
| Expense on units sold | 95,000 | $192,723.82 |
| Ending inventory | 25,000 | 50,716.79 |
| Current extraction | 120,000 | $243,440.61 |
The resource's ending carrying amount after current extraction is $1,682,363.95. The inventory amount is a separate current asset; it is not put back into the resource property.
Keep the liability clock separate
One year of accretion is $19,548.27, increasing the ARO to $345,352.84. Those display amounts are each rounded to cents; the rollforward uses the unrounded $325,804.5633696 initial measure, so adding the two displayed rows differs by a cent. The workbook and typed calculation retain full precision. Current depletion does not reduce that liability. The resource/retirement working paper therefore contains an asset allocation schedule and a liability rollforward, joined by the initial amount but never collapsed into one balance.
Verification boundary
The check reproduces scenario weights, present value, depletable base, unit rate, extraction allocation, inventory/expense split, and one year of accretion. It does not verify legal enforceability, engineering scope, reserve quantity, cash-flow estimation, rate selection, extraction ownership, or specialized oil-and-gas guidance.
Quantitative companions
Choose from 2 ways to work with this calculation.
Verified calculation · depletion and retirement obligation analysis
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- accretion periods
- 1
- discount rate
- 0.06
- recoverable units
- 900,000
- residual value
- 100,000
- resource costs
- 2 fields
Inspect data
{
"development": 400000,
"mineral_rights": 1200000
}- retirement scenarios
- 2 fields
Inspect data
{
"base_case": {
"cash_flow": 400000,
"probability": 0.7
},
"high_case": {
"cash_flow": 520000,
"probability": 0.3
}
}- units extracted
- 120,000
- units sold
- 95,000
- years to settlement
- 5
Recomputed result
| Measure | Value |
|---|---|
| aro after accretion | 345,352.8372 |
| cumulative accretion | 19,548.2738 |
| depletable base | 1,825,804.5634 |
| depletion expense | 192,723.815 |
| depletion in ending inventory | 50,716.7934 |
| depletion rate per unit | 2.0287 |
| ending inventory units | 25,000 |
| ending resource carrying amount | 1,682,363.9549 |
| expected retirement cash flow | 436,000 |
| extraction depletion | 243,440.6084 |
| initial asset retirement cost | 325,804.5634 |
| initial retirement obligation | 325,804.5634 |
| resource cost before retirement | 1,600,000 |