Question

In: Accounting

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 1 year ago
Next > < Previous

Related Solutions

Deep Sea Drilling is evaluating drilling for oil in the Gulf of Mexico. It will cost...
Deep Sea Drilling is evaluating drilling for oil in the Gulf of Mexico. It will cost $830 million to buy an oil rig. Drilling would start immediately. The company has a cost of capital of 9%. There is a 50% probability that the new well will be successful, in which case the free cash flow from the well will be $200 million per year for 20 years. Otherwise, it will only generate $40 million per year for 10 years. Part...
Deep Sea Drilling is evaluating drilling for oil in the Gulf of Mexico. It will cost...
Deep Sea Drilling is evaluating drilling for oil in the Gulf of Mexico. It will cost $830 million to buy an oil rig. Drilling would start immediately. The company has a cost of capital of 8%. There is a 50% probability that the new well will be succcessful, in which case the free cash flow from the well will be $200 million per year for 20 years. Otherwise, it will only generate $40 milion per year for 10 years. PART...
Cons of deep water oil drilling. Do you believe that deep water oil is worth the...
Cons of deep water oil drilling. Do you believe that deep water oil is worth the cost.
Drilling for oil in the Arctic The chase is now on, as sea channels clear of...
Drilling for oil in the Arctic The chase is now on, as sea channels clear of sea ice, for oil exploration in the Arctic region. There is actually not much care about global warming by major superpower governments, as they see that domination of the world’s oil resources is vital in maintaining both economic and military security. Please discuss this, as far as your knowledge into this difficult issue will allow. The main purpose of Assignment One (A1) is to...
Conroe Inc. makes deep sea two-stage submersible pods for oceanic deep sea exploration and it costs...
Conroe Inc. makes deep sea two-stage submersible pods for oceanic deep sea exploration and it costs Conroe, Inc. $44 per part to make 1,000 parts each month and each part can be sold for $69. Or Conroe could process the parts into a more intricately designed product, which would cost $38 more per part. The more intricately designed product could be sold for $103 per item. If the more intricately designed product was completed how would income be affected? 1....
On Jan 1, 2018, the North Sea Company purchased a highsea platform for $ 12,000,000 and...
On Jan 1, 2018, the North Sea Company purchased a highsea platform for $ 12,000,000 and paid $2,000,000 as a downpyament while the balance will be paid over the next 10 years in installments of $500,000 every six months , starting July 1, 2018. The market rate on Jan 1, 2018 was 6%. Requirements: a.   For the how much the North Sea Company should recognize the platform on Jan 1, 2018? Show your calculation. b.   On Jan 1, 2025, the...
Swan Furnace Cleaners purchased an oil platform on January 2, 2015 for $5 million. It will...
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...
Concord Corp. erected and placed into service an offshore oil platform on January 1, 2020, at...
Concord Corp. erected and placed into service an offshore oil platform on January 1, 2020, at a cost of $10 million. Concord is legally required to dismantle and remove the platform at the end of its 8-year useful life. Concord estimates that it will cost $1 million to dismantle and remove the platform at the end of its useful life and that the discount rate to use should be 8%. Using (a) factor Table A.2, (b) a financial calculator, or...
Stahn Inc., an oil production company, purchased a machine on January 1, 2018. The following information...
Stahn Inc., an oil production company, purchased a machine on January 1, 2018. The following information applies: Cost Estimated useful life Residual value $40,000 3 years $4,000 The year-end of the company is December 31. Required: 1. Calculate the depreciation expense and the carrying amount at year-end for the three-year period using the straight-line and double-declining balance methods. 2. Assume depreciation has been recorded using the double-declining balance method. The machine is obsolete at the end of two years and...
A drilling machine that cost $320,000 is owned by Alpha Beta Oil, Inc. Salvage is estimated...
A drilling machine that cost $320,000 is owned by Alpha Beta Oil, Inc. Salvage is estimated at $75,000. (a) Compare book values for MACRS and standard SL depreciation over a 7-year recovery period. (b) Explain how the estimated salvage is treated using MACRS
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT