Question

On January 1, 2020, Blue Spruce Corporation erected a drilling platform at a cost of $4,695,600. Blue Spruce is legally required to dismantle and remove the platform at the end of its 6 year useful life, at an estimated cost of $817,000. Blue Spruce estimates that 70% of the cost of dismantling and removing the platform is caused by acquiring the asset itself, and that the remaining 30% of the cost is caused by using the platform in production. The present value of the increase in asset retirement obligation related to the production of oil in 2020 and 2021 was $27,802 and $30,026, respectively. The estimated residual value of the drilling platform is zero, and Blue 1 Spruce uses straight-line depreciation. Blue Spruce prepares financial statements in accordance with IFRS. 2 A) Prepare the journal entries to record the acquisition of the drilling platform, and the asset retirement obligation for the platform, on January 1, 2020. An appropriate interest or discount rate is 8%. Use Excel function 3 PV in your calculations. 4 B) Prepare any journal entries required for the platform and the asset retirement obligation at December 31, 5 2020. 6 C) Assume that on December 31, 2025, Blue Spruce dismantles and removes the platform at a cost of $792,920. Prepare the journal entry to record the settlement of the asset retirement obligation. Also assume its carrying 7 amount at that time is $817,000. 8

Answer 1

a)
Date	Account Titles and Explanation	Debit	Credit
Jan 1 2020	Drilling Platform	$ 4,695,600.00
	Cash		$ 4,695,600.00
	Drilling Platform	$360,394.01
	Asset Retirement Obligation		$360,394.01
b)
31-Dec-20	Drilling Platform (4,695,600 + $360,394.01)	$    842,665.67
	Accumulated Depreciation – Drilling Platform		$    842,665.67
	Interest Expense ($360,394.01 x 8%)	$      28,831.52
	Asset Retirement Obligation		$      28,831.52
	Inventory	$      27,802.00
	Asset Retirement Obligation		$      27,802.00
c)
31-Dec-25	Asset Retirement Obligation	$    817,000.00
	Gain on Settlement of ARO		$      24,080.00
	Cash		$    792,920.00

А B с D Credit Account Titles and Explanation Drilling Platform Cash Debit 4695600 =C3 =(PV(8%,6,0,-817000))*70% Drilling Platform Asset Retirement Obligation =C6 =(C3+C6/6 Drilling Platform (4,695,600 + $360,394.01) Accumulated Depreciation - Drilling Platform =C9 1 a) 2 Date 3 Jan 1 2020 4 5 6 7 8 b) 9 44196 10 11 12 13 14 15 16 17 18 c) 19 46022 20 21 22 23 =C6.8% Interest Expense ($360,394.01 x 8%) Asset Retirement Obligation =C12 27802 Inventory Asset Retirement Obligation =C15 817000 Asset Retirement Obligation Gain on Settlement of ARO Cash =C19-D21 792920