Asset Retirement Obligation Wildcat Oil Company is erecting a drilling platform
ID: 2472121 • Letter: A
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