Question

If a company incurs legal obligations associated with the retirement of a tangible long-lived asset as a result of acquiring the asset, what is the impact on the company's financial statements?

1) The company will recognize a liability on its balance sheet
2) The company will recognize an expense on its income statement
3) The company's cash flow will increase
4) The company's stock price will decrease

Answer 1

When a company incurs legal obligations associated with the retirement of a tangible long-lived asset, it will recognize a liability on its balance sheet and an expense on its income statement.

Step-by-step explanation:

When a company acquires a tangible long-lived asset, it may also incur legal obligations associated with the retirement of that asset. These obligations typically arise due to environmental regulations or contractual agreements. The impact of these legal obligations on the company's financial statements is as follows:

1. The company will recognize a liability on its balance sheet: The legal obligations associated with the retirement of the asset will result in the recognition of a liability on the company's balance sheet. This liability represents the company's obligation to fulfill its retirement-related obligations in the future.
2. The company will recognize an expense on its income statement: As the company incurs costs or expenses related to the retirement of the asset, it will recognize these expenses on its income statement. These expenses will reduce the company's net income and, subsequently, its retained earnings.

Therefore, options 1) The company will recognize a liability on its balance sheet and 2) The company will recognize an expense on its income statement are both correct.