Question

Pina Company purchases an oil tanker depot on January 1, 2020, at a cost of $652,100. Pina 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 $72,300 to dismantle the depot and remove the tanks at the end of the depot’s useful life.

(a) 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 $40,372

(b) Prepare any journal entries required for the depot and the asset retirement obligation at December 31, 2020. Pina uses straight-line depreciation; the estimated salvage value for the depot is zero

(c) On December 31, 2029, Pina pays a demolition firm to dismantle the depot and remove the tanks at a price of $80,920. Prepare the journal entry for the settlement of the asset retirement obligation

Answer 1

Part - (a):

1.

To record entry for payment of depot in cash is:

1 Date Accon Date Credit Account Titles and Explanation Depot To Cash (To record the depot) Debit $652.100 January 1, 2020 3 $652.100

2.

To record entry for asset obligation is:

Date Credit Account Titles and Explanation | Debit Depot $40,372 To Asset obligation (To record the asset obligation) January 1, 2020 8 $40,372 9

Part - (b)

1.

To record entry for depreciation for the depot is:

A 11 Date Account Titles and Explanation Credit Debit $65.210 December 31. Depreciation 13 $65,210 2020 To Accumulated depreciation (To record depreciation for the depot) 14

Working Note:

Computation of depreciation on depot is:

Depreciation on depot = Value of depot / Estimated life

= $652,100 / 10

= $65,210

Hence, the depreciation on asset obligation is $65,210.

2.

To record entry for depreciation on asset obligation is:

D Credit Debit $4.037 A 16 Date Account Titles and Explanation 17 Depreciation 18 December 31, To Accumulated depreciation 2020 (To record depreciation on asset 19 obligation) $4,037

Working Note:

Computation of depreciation on asset obligation is:

Depreciation on asset obligation = Present value of asset obligation / Estimated life

= $40,372 / 10

= $4,037

Hence, the depreciation on asset obligation is $4,037.

3.

To record entry for interest on asset obligation is:

Date Credit Debit $2,422 December 31, 2020 Account Titles and Explanation Interest expense To Asset obligation (To record interest on asset obligation) $2.422

Working Note:

Computation of interest expense is:

Interest expense = Present value of asset obligation * Percentage of interest

= $40,372 * 0.06

= $2,422

Hence, the interest expense is $2,422.

Part - (c):

To record entry for settlement of asset obligation is:

A | Credit 26 Date Account Titles and Explanation Asset obligation 28 December 31, Loss on settlement 29 2029 To Cash 30 (To record settlement of asset obligation) Debit $72,300 $8,620 $80.920

Working Note:

Computation the amount of loss on settlement is:

Amount of loss on settlement = Amount of cash - Amount of asset obligation

= $80,290 - $72,300

= $8,620

Hence, the amount of loss on settlement is $8,620.