A company buys an oil rig for $7,000,000 on January 1, 2007. The life of the rig

Question

A company buys an oil rig for $7,000,000 on January 1, 2007. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $500,000. Assuming an annual interest rate of 10%, what expense should be recorded for 2008 as a result of these events? (Answer is B, however please show work)

a. Depreciation expense of $700,000 and interest expense of $19,278

*b. Depreciation expense of $719,278 and interest expense of $21,206

c. Depreciation expense of $700,000 and interest expense of $21,206

d. Depreciation expense of $719,278 and interest expense of $19,278

Also, record the 2007 depreciation expense and interest expense and show work, explain how you solved the question.

Explanation / Answer

The present value of 500000 is =500000/(1+10%)^10=192778

The depreciation expense =total cost/salvage value

=(7000000+192778)/10=719278 and

the interets expense=192778/10=19278

It is option D

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