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AccountingIntermediate Accounting: Reporting And Analysis3rd Edition

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Chapter 11, Problem 10P
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Intermediate Accounting: Reporting...

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

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Problem 4GI
Problem 5GI
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Problem 7GI
Problem 8GI
Problem 9GI
Problem 10GI
Problem 11GI
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Problem 16GI
Problem 17GI
Problem 18GI
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Problem 7P
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Problem 10P
Problem 11P
Problem 12P
Problem 13P
Problem 14P
Problem 15P
Problem 16P
Problem 17P
Problem 18P
Problem 19P
Problem 20P
Problem 21P
Problem 1C
Problem 2C
Problem 3C
Problem 4C
Problem 5C
Problem 6C
BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Pete’s Petroleum, Inc., an SEC registrant with a calendar year-end, is in the business of constructing and operating offs] lore oil platforms. Pete’s Petroleum is required legally to dismantle and remove the platforms at the end of their useful lives, which is estimated to be 10 years. On January 1, 2019, Pete constructed and began operating an offshore oil platform off the coast of Brazil. The total capitalized cost to construct the platform was $3,700,000. In addition, while the future cost of dismantling the oil platform is difficult to estimate, Pete believes there is a 40% chance that the future cost will be $1,425,000, a 40% chance it will be $1,650,000, and a 20% chance that it will cost $2,125,000. The appropriate discount rate is 12%, and Pete uses the straight-line method of depreciation.

Required:

  1. 1. Prepare the journal entries that Pete should record in 2019 related to the oil platform.
  2. 2. Prepare an amortization schedule for the asset retirement obligation.
  3. 3. Next Level Prepare a table showing the effect of accounting for the asset retirement obligation on assets, liabilities, shareholders’ equity, and net income relative to accounting for the associated costs at the end of the asset’s service life when the expenditure is made.

1.

To determine

Prepare journal entries for the given transactions.

Explanation

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Straight-line depreciation method: The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

Prepare journal entries for the given transactions as follows:

:

DateAccount Title & ExplanationDebit ($)Credit($)
January 1, 2019Oil Platform (2)4,232,865
 Cash  3,700,000
     Asset Retirement Obligation (1) 532,865
 (To record the acquisition of oil platform)

Table (1)

  • Oil Platform is an asset and it is increased by $4,232,865. Therefore, debit the oil Platform account with $4,232,865.
  • Cash is an asset, and it decreases the value of assets by $3,700,000. Therefore, credit trucks account with $3,700,000.
  • Asset retirement obligation is an asset, and it decreases the value of assets by $532,865. Therefore, credit asset retirement obligation account with $532,865.

Working note (1):

Cost (a)% increase (b)Total (a×b)
1,425,00040%570,000
1,650,00040%660,000
2,125,00020%425,000
Total cost (A) 1,655,000
Present value of TVM Module (B) 0.321973
(A×B) 532,865

Table (2)

Note:

The Present value of $1 for 10 years at 12% is 0.321973 (refer table 3 in TVM module)

2.

To determine

Prepare an amortization schedule of Company P for the asset retirement obligation.

3.

To determine

Prepare a table showing the effects of financial statements.

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Ch-11 P-11GICh-11 P-12GICh-11 P-13GICh-11 P-14GICh-11 P-15GICh-11 P-16GICh-11 P-17GICh-11 P-18GICh-11 P-19GICh-11 P-20GICh-11 P-21GICh-11 P-22GICh-11 P-23GICh-11 P-1MCCh-11 P-2MCCh-11 P-3MCCh-11 P-4MCCh-11 P-5MCCh-11 P-6MCCh-11 P-7MCCh-11 P-8MCCh-11 P-9MCCh-11 P-10MCCh-11 P-1RECh-11 P-2RECh-11 P-3RECh-11 P-4RECh-11 P-5RECh-11 P-6RECh-11 P-7RECh-11 P-8RECh-11 P-9RECh-11 P-10RECh-11 P-11RECh-11 P-12RECh-11 P-13RECh-11 P-14RECh-11 P-1ECh-11 P-2ECh-11 P-3ECh-11 P-4ECh-11 P-5ECh-11 P-6ECh-11 P-7ECh-11 P-8ECh-11 P-9ECh-11 P-10ECh-11 P-11ECh-11 P-12ECh-11 P-13ECh-11 P-14ECh-11 P-15ECh-11 P-16ECh-11 P-17ECh-11 P-18ECh-11 P-19ECh-11 P-20ECh-11 P-1PCh-11 P-2PCh-11 P-3PCh-11 P-4PCh-11 P-5PCh-11 P-6PCh-11 P-7PCh-11 P-8PCh-11 P-9PCh-11 P-10PCh-11 P-11PCh-11 P-12PCh-11 P-13PCh-11 P-14PCh-11 P-15PCh-11 P-16PCh-11 P-17PCh-11 P-18PCh-11 P-19PCh-11 P-20PCh-11 P-21PCh-11 P-1CCh-11 P-2CCh-11 P-3CCh-11 P-4CCh-11 P-5CCh-11 P-6C

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