Millsap Drillers erects and places into service an off-shore oil platform on Jan
ID: 2497224 • Letter: M
Question
Millsap Drillers erects and places into service an off-shore oil platform on January 1, 2016, at a cost of $20,000,000. Millsap is legally required to dismantle and remove the platform at the end of its useful life in 10 years. Millsap estimates it will cost $2,000,000 to dismantle and remove the platform at the end of its useful life in 10 years. (The present "fair" value at January 1, 2016, of the dismantle and removal costs is $900,000).
Millsap will capitalize Blank 1 to the Drilling Platform asset account on January 1, 2016 with a credit to the Asset Retirement Obligation account for the same amount.
Millsap will depreciate Blank 2 of cost each year related to the ARO (assuming the straight-line depreciation method).
Millsap Drillers erects and places into service an off-shore oil platform on January 1, 2016, at a cost of $20,000,000. Millsap is legally required to dismantle and remove the platform at the end of its useful life in 10 years. Millsap estimates it will cost $2,000,000 to dismantle and remove the platform at the end of its useful life in 10 years. (The present "fair" value at January 1, 2016, of the dismantle and removal costs is $900,000). to the Drilling Platform asset account on January 1, 2016 with a credit to the Asset Retirement Obligation account for the Millsap will capitalize same amount. Millsap will depreciate of cost each year related to the ARO (assuming the straight-ine depreciation method)Explanation / Answer
In the given case the, fair value will be treated as the present value of the asset retirement obligation and will therefore, be capitalized with the initial investment of $20,000,000. The amount of fair value of $900,000 recognized on January 1, 2016 will be depreciated over the life of the platform in equal proportion with the use of straight line method. The cost of $2,000,000 is not to be considered for the purposes of creating a liability on account of ARO. Based on this, the answers have been provided below:
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Part A)
Mislap will capitalize $900,000 to the Drlling Platform asset account on January 1, 2016 with a credit to the Asset Retirement Obligation account for the same amount.
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Part B)
Milsap will depreciate $90,000 (900,000/10) of cost each year to the ARO (assuming the straight-line depreciation method).