C. In January 2016, Deep Sea Oil Inc. builds and begins operating an oil drillin

Question

C. In January 2016, Deep Sea Oil Inc. builds and begins operating an oil drilling platform in the Gulf of Mexico.   The company expects to operate the platform for 6 years and will be required to remove the platform at the end of 6 years at an expected cost of $1,000,000. Assuming that the discount rate is 10%.
a. Prepare the journal entry to record the asset retirement obligation (ARO) in January 2016
b. Prepare the journal entry to record the annual depreciation in 2016 and adjustment to the ARO.
c. Prepare the 6-year amortization schedule for the ARO.
d. Assume that at the end of 6 years, it costs the company $1,025,000 to remove the platform. Prepare the entry (assume payment is in cash).

Explanation / Answer

Answer:a Platform A/C Dr. $564473.93

                    To Asset Retirement Obligation A/C       $564473.93

Answer:b

Depreciation Expense . ...................... 166667

      To Accumulated Depreciation. ............................ 166667

Depreciation Expense . ...................... 94078.98

   To Accumulated Depreciation. ............................ 94078.98

Interest Expense . .............................. 56447.393

   To Asset Retirement Obligation . ........................ 56447.393

( $564473.93 x 10% =56447.393)

Answer:d

Asset Retirement Obligation . .............................. 1000,000

Loss on ARO settlement. ...................................... 25,000

        To Cash. .......................................................................... 10,25000

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