Question

Blue Company purchases an oil tanker depot on January 1, 2020, at a cost of $543,400. Blue expects to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove the underground storage tanks. It is estimated that it will cost $81,690 to dismantle the depot and remove the tanks at the end of the depot’s useful life.

Prepare the journal entries to record the depot and the asset retirement obligation for the depot on January 1, 2020. Based on an effective-interest rate of 6%, the present value of the asset retirement obligation on January 1, 2020, is $45,615. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit January 1, 2020 (To record the depot) January 1, 2020 (To record the asset retirement obligation)

Prepare any journal entries required for the depot and the asset retirement obligation at December 31, 2020. Blue uses straight-line depreciation; the estimated salvage value for the depot is zero. (Round answers to 0 decimal places, e.g. 5,275. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit December 31, 2020 (To record depreciation for the depot) December 31, 2020 (To record depreciation on asset retirement obligation) December 31, 2020 (To record interest on asset retirement obligation)

On December 31, 2029, Blue pays a demolition firm to dismantle the depot and remove the tanks at a price of $83,420. Prepare the journal entry for the settlement of the asset retirement obligation. (Round answers to 0 decimal places, e.g. 5,275. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit December 31, 2029

Answer 1

Ans:

A). Journal Entries

Date	Account title and explanation	Debit($)	Credit($)
Jan 1,2020	Depot	$543,400
	Cash		$543,400
	( to record the depot)
Jan 1,2020	Depot	$45,615
	Asset retirement obligation		$45,615
	(to record the asset retirement obligation)

B). Journal entries

Date	Account title and explanation	Debit($)	Credit($)
Dec 31,2020	Depreciation	$54,340
	Accumulated depreciation		$54,340
	(to record the depreciation of depot)
Dec 31,2020	Depreciation	$4,562
	Accumulated depreciation		$4,562
	( to record the depreciation of asset retirement obligation)
Dec 31,2020	Interest expense (45,615*6%)	$2,737
	Asset retirement obligation		$2,737
	(to record interest on asset retirement obligation)

C). Journal entry

Date	Account title and explanation	Debit($)	Credit($)
Dec 31,2029	Asset retirement obligation	81,690
	Loss on ARO Settlement	1,550
	Cash		83,240