Leaning Tower Inc. developed and operationalized an offshore oil platform on Mar

Question

Leaning Tower Inc. developed and operationalized an offshore oil platform on March 1, 2018 at a cost of $10 million. Leaning Tower Inc. is legally required to dismantle and remove the platform at the end of its nine-year useful life. Leaning Tower Inc. estimates that it will cost $1 million to dismantle and remove the platform at the end of its useful life and that the discount rate to use should be 8%. Prepare the entry to record the asset retirement obligation. Assume that none of the $1 million cost relates to production. NOTE: I need to please see the calculations to understand

Explanation / Answer

Note for your understandings:

The Asset created will be depreciated over the useful life.

At the end of 9 years when the retirement obligation will arise then the liability created will be reversed.

Discount Rate 8% Dismantle and removel Cost $                                 1,000,000.00 Usefull Life 9 Years Present Value Factor 1/1.08^9 = 0.500248967 0.500248967 Present Value of Dismantle and removel Cost 1000000*0.500248967131459 = $         500,248.97

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