Question

Will Rate:

E13.14B (LO 3) (Asset Retirement Obligation) Oil Products Company purchases an oil tanker depot on January 1, 2020, at a cost of $2,400,000. Oil Products 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 $300,000 to dismantle the depot and remove the tanks at the end of the depot's useful life. Instructions (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 $167,516. (b) Prepare any journal entries required for the depot and the asset retirement obligation at December 31, 2020. Oil Prod- ucts uses straight-line depreciation; the estimated residual value for the depot is zero. (c) On December 31, 2029, Oil Products pays a demolition firm to dismantle the depot and remove the tanks at a price of $320,000. Prepare the journal entry for the settlement of the asset retirement obligation.

Answer 1

solution Date particularz Debit Gedet a) Jan 1, 20 2400000 2400000 Jan 1, 2020 Depot To cash [To record purchase of Depot ] Depot To Asset petirement oblegation [To record asset rettrement Obligation] 167516 167516 b) Dec 31, 20 240000 Depreciation expense 240000 [ 2400000/10 year] To Accumolated depreciation [ to record Depreciation for sepot | Depreciation expense 16752 [ 167516/10 yeary) [ To record depreciation for Asset retirement oblegation] Dec 31, 20 16752 Dec 31, 20 Interest expense al 10051 [ 167516 X 6'/] Asset retirement oblegation [ To record Interest on Asset | Asset retirement obligation] | 10051

(c) Dec 31,19 300000 20000 Asset gretirement obligation Loss on retirement obligation [ 320000 – 300000] To cash 4 Being Tank sold at Lose 320000 ]