Lifeline Biofuels built an oil rig at a cost of $4.5 million. The company estimates the oil rig will have a useful life of 20 years (with no salvage value), after which Federal regulations require that the oil rig must be dismantled and the land area restored. The present value of these asset retirement costs is $1.4 million based on the 6% after-tax discount rate
a. Prepare the journal entry prepared at the completion of construction to value the oil rig.
b. Prepare the journal entry to record the annual increase in the carrying value of the liability.
What will be an ideal response?
Answer:
a.
Oil Rig
$5.9 million
Asset Retirement Obligation
$1.4 million
Cash
$4.5 million
b.
Accretion Expense
$84,000
Asset Retirement Obligation
$84,000
$1.4 million × 6% = $84,000
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