Question

Swan Furnace Cleaners purchased an oil platform on January 2, 2015 for $5 million. It will use the oil platform for 3 years at which time it will be dismantled. The cost of decommissioning the oil platform after 3 years is $0.50 million. The effective rate of interest for Swan Furnace Cleaners is 5% and all purchases were made for cash. Swan Furnace Cleaners' fiscal year end is December 31, 2015.

Enter an appropriate description when entering the transactions in the journal. Dates must be entered in the format dd/mmm (ie. January 15 would be 15/Jan).
Please make sure your final answer(s) are accurate to 2 decimal places. Record the following entries:

a) The purchase of the oil platform.

b) The recognition of the asset retirement obligation (ARO).

c) The adjusting entries required at year end regarding the oil platform assuming Swan Furnace Cleaners uses the straight-line method for its long-term assets.

d) The entry on January 3, 2018 to dismantle the oil platform assuming it cost Swan Furnace Cleaners $980,000.

e) Indicate on which statements the following appear:

Answer 1

a.)	Date	Account Tiltes & Explanation	Debit $	Credit $
	January 2,2015	Oil Platform	5,000,000
		Cash		5,000,000
		( to record purchase of the oil platform )
b.)	Date	Account Tiltes & Explanation	Debit $	Credit $
	January 2,2015	Oil Platform	431,920
		Asset retirement obligation		431,920
		(500,000 x (1/1.05)^3 ) or ( 500,000 x 0.86384)
c.)	Date	Account Tiltes & Explanation	Debit $	Credit $
	December 31,2015	Depreciation	1,810,640
		Accumulated Depreciation- Storage Tank		1,810,640
		(5,000,000 + 431,920) /3
	December 31,2015	Accretion Expense	21,596
		Asset retirement obligation		21,596
		(431,920 x 5% )
d.)	Date	Account Tiltes & Explanation	Debit $	Credit $
	January 3,2018	Asset retirement obligation	500,000
		Loss on retirement	480,000
		Cash		980,000