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This is the first time I have used this site and I am not sure what I need to do. Any help will be greatly appreciated. I am having trouble with this problem in "Intermediate Accounting Reporting and Analysis" by James Wahlen, pg 11-49: P11-10

Pete’s Petroleum, Inc., an SEC registrant with a calendar year-end, is in the business of constructing and operating offshore oil platforms. Pete’s Petroleum is required legally to dismantle and remove the platforms at the end of their useful lives, which is estimated to be 10 years. On January 1, 2016, Pete constructed and began operating an offshore oil platform off the coast of Brazil. The total capitalized cost to construct the platform was $3,700,000. In addition, while the future cost of dismantling the oil platform is difficult to estimate, Pete believes there is a 40% chance that the future cost will be $1,425,000, a 40% chance it will be $1,650,000, and a 20% chance that it will cost $2,125,000. The appropriate discount rate is 12%, and Pete uses the straight-line method of depreciation.

Required: 1. Prepare the journal entries that Pete should record in 2016 related to the oil platform. 2. Prepare an amortization schedule for the asset retirement obligation. 3. Next Level Prepare a table showing the effect of accounting for the asset retirement obligation on assets, liabilities, shareholders’ equity, and net income relative to accounting for the associated costs at the end of the asset’s service life when the expenditure is made.

Explanation / Answer

Working Notes :-

Journal Entry for Capitalisation of Asset is as follows :-

Answer 2 :-

Answer 3 :-

Asset Shedule

Asset retirement Obligation has 2 implication :-

1) It decreases cost of assets with depreciation rate ever year.

2) Finnace cost is debited every year so that at the end of useful life, sufficient amount is there to dismantle the asset.

Expected Future Expenditure Expenditure Probability Amount 1425000 40% 570000 1650000 40% 660000 2125000 20% 425000 100% 1655000 Present Value of Expected Expenditure 1655000 = 532865.7 (1+0.12)10

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