In: Accounting
Cheyenne Company purchases an oil tanker depot on January 1, 2020, at a cost of $648,500. Cheyenne expects to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove the underground storage tanks. It is estimated that it will cost $79,920 to dismantle the depot and remove the tanks at the end of the depot’s useful life.
Prepare the journal entries to record the depot and the asset
retirement obligation for the depot on January 1, 2020. Based on an
effective-interest rate of 6%, the present value of the asset
retirement obligation on January 1, 2020, is $44,627.
Date |
Account Titles and Explanation |
Debit |
Credit |
January 1, 2020 |
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(To record the depot) |
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January 1, 2020 |
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(To record the asset retirement obligation) |
Prepare any journal entries required for the depot and the asset
retirement obligation at December 31, 2020. Cheyenne uses
straight-line depreciation; the estimated salvage value for the
depot is zero.
Date |
Account Titles and Explanation |
Debit |
Credit |
December 31, 2020 |
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(To record depreciation for the depot) |
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December 31, 2020 |
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(To record depreciation on asset retirement obligation) |
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December 31, 2020 |
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(To record interest on asset retirement obligation) |
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On December 31, 2029, Cheyenne pays a demolition firm to dismantle
the depot and remove the tanks at a price of $84,200. Prepare the
journal entry for the settlement of the asset retirement
obligation.
Date |
Account Titles and Explanation |
Debit |
Credit |
December 31, 2029 |
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