In January 2016, Deep Sea Oil Inc builds and begins operating an oil drilling pl
ID: 2420951 • Letter: I
Question
In January 2016, Deep Sea Oil Inc builds and begins operating an oil drilling platform the Gulf of Mexico The company expects to operate the platform for 5 years and will be required to remove the platform at the end of 5 years at an expected cost of $2,000,000 Assuming that the discount rate is 8% Prepare the journal entry to record the asset retirement obligation (ARO) m January 2016 Prepare the journal entry to record the annual depreciation in 2016 and adjustment to the ARO Prepare the 5-year amortization schedule for the ARO. Assume that at the end of 5 years, it costs the company $2,125,000 to remove the platform Prepare the entry (assume payment is in cash)Explanation / Answer
Answer a. PV of $2,000,0000 at 8% Discount = $2,000,000 X .68058 = $1361160 Journal Entry Extaction Right Dr. $1,361,160 To Asset Retirement Obligation $1,361,160 (To record the purchase the right of ARO) Answer b. Journal Entry Depreciation Exp. Dr. 272232 To Accumulated Dep. 272232 (To record depreciation on Extraction Right = $1361160/5 Years) Interest Exp. Dr. 108,893 To Asset Retirement Obligation 108,893 (Record the interest expenses on ARO - $1361160 x 8%) Answer c. Year Interest Exp. ARO 0 - 1,361,160 1 108,893 1,470,053 2 117,604 1,587,657 3 127,013 1,714,670 4 137,174 1,851,843 5 148,156 2,000,000 Answer d. Journal Entry Assets Retirement Obligation Dr. 2,000,000 Interest Expense Dr. 125,000 To Cash 2125000 (ARO paid and change in ARO is charged to interest Account)
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