Question

Pina Colada Corp. erected and placed into service an offshore oil platform on January 1, 2020, at a cost of $12 million. Pina Colada is legally required to dismantle and remove the platform at the end of its 7-year useful life. Pina Colada estimates that it will cost $1 million to dismantle and remove the platform at the end of its useful life and that the discount rate to use should be 9%. Use (a) factor Table A.2. (b) a financial calculator, or (c) Excel function PV. Ignore production related costs for this question. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1. Your answer is partially correct. Prepare any necessary adjusting entries that are associated with the asset retirement obligation and related expenses at December 31, 2020, assuming that Pina Colada follows IFRS. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts.)

Answer 1

Entry for Recognising retirement obligation

Present value of estimated amount of dismantling charges are recognised now and each year interest expense is added to that amount so that at end of 7 years entity can pay the estimated amount.

Present value of retirement obligation = $ 1,000,000 * PVF ( 9% , 7 years )

= $ 1,000,000 * 0.5470

= $ 547,000

Journal Entries

	Dr	Cr
Asset A/c	$ 547,000
To Asset Retirement Obligation		$ 547,000
( Being asset retirement obigation recognised on Jan 1st 2020 )
Interest Expense A/c	$ 49,230
To Asset Retirement Obligation		$ 49,230
( Being Interest recognised at Dec 31st 2020 )