Question

Recording Asset Retirement Obligation

BPP Company maintains underground storage tanks for its operations. A new storage tank was installed and made ready for use at a cost of $400,000 on January 1, 2020. The useful life is estimated at 15 years, at which time the company is legally required to remove the tank and restore the area at an estimated cost of $40,000. The appropriate discount rate for the company is 12%.

Answer the following questions, rounding your answers to the nearest whole number.

a. Record the storage tank asset and the related asset retirement obligation on January 1, 2020.

b. Record any required adjusting entries on December 31 2020.

c. Assume that on December 31, 2035, the tank is safely removed at a cost of $46,000. Record the required journal entry.

Answer 1

Date	Accounts	Debit $	Credit $
2020
Jan-01	New Storage tank	400,000
	cash/Bank		400,000
	(to record new asset)
	New Storage tank	7,308
	Asset retirement obligation		7,308
	(to record asset retirement obligation )
Dec-31	Depreciation Expense	27,154
	Accumulated Depreciation		27,154
	(to record depreciation)
	interest expense note	877
	Asset retirement obligation		877
	(to record interest expense)
2035
Dec-31	Asset retirement obligation	40,000
	loss on Asset retirement obligation	6,000
	cash/Bank		46,000
	( to record tan removel cost)

note

Particulars	Amount $
Restoration Cost	40,000.00
Present value factor @12% for 15th year	0.18269
Present value asset retirement obligation	7,308
interest 12%	877

Assumption:

Answer provided without decimal point, you can provide answer with required decimal points

Depreciation charged on straight line method