Asset Retirement Obligation Wildcat Oil Company is erecting a drilling platform

Question

Asset Retirement Obligation

Wildcat Oil Company is erecting a drilling platform in the Gulf of Mexico, at a cost of $2,500,000. Wildcat is legally obligated to remove the platform at the end of its useful life, which is expected to be 10 years. The cost to dismantle is expected to be $1,000,000. Assuming an interest rate of 8%, the present value of this obligation is .46319. At the end of 10 years, the platform is dismantled, at a cost of $1,200,000. In the space below, give the journal entries required to record the asset retirement obligation, depreciation of the asset for one year, interest on the retirement obligation for the first year, and payment of the cost to dismantle 10 years later. You should record four journal entries. DO NOT record the $2.5M cost of the drilling platform as your first entry. I only want four journal entries relating to the Asset Retirement Obligation.

Explanation / Answer

Description

Debit

Credit

Drilling Platform

$463190

               Asset retirement Obligation

$463190

To Record Retirement obligation

Depreciation Expense(Asset retirement cost)($463190/10)

$46319

          Accumulated Depreciation

$46319

To record Depreciation of asset for one year

Interest Expense ($463190*8%)

$37055

            Asset retirement Obligation

$37055

To record Interest on retirement obligation for first year

                                

Asset retirement Obligation

$1000000

Loss On Settlement of ARO                    

   $200,000

        Cash

$1200000

To record payment of the cost to dismantle 10 year later

Description

Debit

Credit

Drilling Platform

$463190

               Asset retirement Obligation

$463190

To Record Retirement obligation

Depreciation Expense(Asset retirement cost)($463190/10)

$46319

          Accumulated Depreciation

$46319

To record Depreciation of asset for one year

Interest Expense ($463190*8%)

$37055

            Asset retirement Obligation

$37055

To record Interest on retirement obligation for first year

                                

Asset retirement Obligation

$1000000

Loss On Settlement of ARO                    

   $200,000

        Cash

$1200000

To record payment of the cost to dismantle 10 year later

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