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On January 1, 2019, AB Company, with year-end of Dec 31, erected an oil platform at...

On January 1, 2019, AB Company, with year-end of Dec 31, erected an oil platform at a cost of $10 million in Norway.The company is legally required to dismantle and remove the platform at the end of its useful life, estimated to be 5 years. The company estimates that dismantling and removal will cost $1,000,000. Based on a 10% discount rate, the fair value of the environmental liability is estimated to be $620,920 ($1,000,000 x .62092). On January 10, 2024, The company contracts with an outside party to dismantle the platform at a contract price of $1,120,000.

  1. Under what situations will environmental liability be recognized? Explain how this is related to the principle of recognition of provision?
  2. For the recognition of environmental liability for the oil platform as above, explain why the amount is capitalized instead of being expensed at the initial recognition of liability. Which principle is being fulfilled?
  3. Assume straight-line method is used for depreciation, if the journal entries for depreciation are missing, how would this affect the net income for each year for AB Company. Explain.
  4. Explain why do we need to record interest expense for each year from 2019 to 2023. (No need to show any calculation or journal entries)
  5. Would the interest expense be the same for each year from 2019 to 2023? Why? (No need to show calculation)
  6. A clerical staff asked you whether there is any way to check whether he has made any mistakes in the calculation of interest expense for each year. Please advise him.
  7. Upon settlement of environmental liability for the oil platform, what is the effect on the net income of AB company in the year 2024?

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Expert Solution

ekkarill92 answered 10 months ago
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