Oil Products Company purchases an oil tanker depot on January 1, 2014, at a cost
ID: 2451704 • Letter: O
Question
Oil Products Company purchases an oil tanker depot on January 1, 2014, at a cost of $645,600. Oil Products expects to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove the underground storage tanks. It is estimated that it will cost $60,900 to dismantle the depot and remove the tanks at the end of the depot’s useful life.
(a)
Date
Account Titles and Explanation
Debit
Credit
(To record the depot)
(To record the asset retirement obligation)
Open Show Work
Oil Products Company purchases an oil tanker depot on January 1, 2014, at a cost of $645,600. Oil Products expects to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove the underground storage tanks. It is estimated that it will cost $60,900 to dismantle the depot and remove the tanks at the end of the depot’s useful life.
Explanation / Answer
(a) Under Statement no. 143 of FASB, an entity must recognize an asset retirement obligation at its fair value—the amount at which an informed willing party would agree to assume the obligation. To estimate the obligation’s fair value a present value technique is often the best approach.
Date Account Title and explanation Debit ($) Credit ($) Jan1, 2014 Oil Tanker 645600 Cash 645600 (purchase of oil tanker depot) Jan 1, 2014 Oil Tanker 37387 Asset Retirement Obligation 37387 (recognition of retirement obligation of the depot at fair value of retirement cost which is the PV of the retirement cost of $60900 after 10 years discounted @ 5%)Related Questions
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