Question

Exercise 13-14

Oil Products Company purchases an oil tanker depot on January 1, 2017, at a cost of $600,000. 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 $75,000 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 (considered a plant asset) and the asset retirement obligation for the depot on January 1, 2017, Based on an effective-interest rate of 6%, the present value of the asset retirement obligation on January 1, 2017, is $41,879. (If no entry is required, select "No Entry" for the account titles and enter O for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) 

Answer 1

Date	Accounts title and explanation	Dr.	Cr.
(a)
January 1,2017	Plant Assets	600000
	To cash		600000
	[To record the depot]
January 1,2017	Plant Assets	41879
	To Asset retirement obligation		41879
	[To record the Asset retirement obligation]
(b)
December 31,2017	Depreciation expense [$600000 / 10 years]	60000
	To Accumulated Depreciation		60000
	[To record depreciation for the depot]
December 31,2017	Depreciation expense [$41879 / 10 years]	4188
	To Accumulated Depreciation		4188
	[To record depreciation for the Asset retirement obligation]
December 31,2017	Interest expense [$41879 * 6%]	2513
	To Asset retirement obligation		2513
	[To record interest on Asset retirement obligation ]
(c)
December 31,2026	Asset retirement obligation	75000
	loss on Asset retirement obligation's settlement [80000 - 75000]	5000
	To cash		80000