In January 2018, Deep Sea Oil Inc. builds and begins operating an oil drilling platform in...

In January 2018, Deep Sea Oil Inc. builds and begins operating an oil drilling platform in the Gulf of Mexico. The company expects to operate the platform for 9 years and will be required to remove the platform at the end of 9 years at an expected cost of $25,000,000. Assuming that the discount rate is 8%.

a. Prepare the journal entry to record the asset retirement obligation (ARO) in January 2018

b. Prepare the journal entry to record the annual depreciation in 2018 and adjustment to the ARO.

c. Prepare the amortization schedule for the ARO.

d. Assume that at the end of 9 years, it costs the company $24,889,000 to remove the platform. Prepare the entry (assume payment is in cash).

Solutions

Expert Solution

Answer a:

Expected cost at the end of 9 years = $25,000,000

Discount rate = 8%

Fair value = 25,000,000 / (1 + 8%) ⁹ = $12,506,224

Answer b;

Answer c:

Answer d:

ekkarill92 answered 5 months ago

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