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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Asset Retirement Obligation Big Cat Exploration erected an oil platform in a remote area of Texas at a cost of $10 million. Bit Cat is legally required to dismantle and remove the platform at the end of its useful life, which is expected to be 10 years. Big Cat estimates that the cost of dismantling and removing the oil rig will be $700,000. Assume that the appropriate discount rate is 8%.

Required:

Prepare the journal entry to record the acquisition of the oil platform. Round your answer to the nearest dollar.

To determine

Journalize the transactions to record the acquisition of the oil platform.

Explanation

Asset retirement obligations:

The procurement of certain operational assets creates an “asset retirement obligation”, which is considered as a legal obligation associated to the retirement of the asset.

Prepare journal entry:

DateAccount Titles and explanationDebit ($)Credit($)
 Oil platform10,324,235 
      Cash 10,000,000
      Asset Retirement Obligation 324,235

Table (1)

  • Oil platform is an asset and it is increased. Therefore, debit oil platform account by $10,324,235.
  • Cash is an asset and it is decreased. Therefore, credit cash account by $10,000,000.
  • Asset retirement obligation is a liability and it is increased. Therefore, credit asset retirement obligation account by $324,235.

Note:  Present value of $1 from Table 3 of Time Value of money Module, where n=10, i= 8%...

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