Question

On Jan. 1, 2014, Wildcat Oil Company erected an oil platform in the Gulf of Mexico. Wildcat is legally required to dismantle and remove the platform at the end of its useful life, estimated to be 5 years. Wildcat estimates that dismantling and removal will cost $1,000,000. Based on a 10% discount rate, the fair value of the asset retirement obligation is estimated to be $620,920 ($1,000,000*0.62092)

A. Record ARO?
B. Journal entry to record expense from the asset retirement costs, using the straight-line method.
C. Journal entry for accrued interest expense each period.
D. On Jan. 10, 2019, Wildcat contracts with Rig Reclaimers, Inc. to dismantle the platform at a contract price of $955,000. Journal entry to record settlement?

Answer 1

To record the Asset Retirement Obligation (ARO), the journal entry is to debit ARO Liability and credit Asset Retirement Cost. To record the expense from the asset retirement costs using the straight-line method, the journal entry is to debit Asset Retirement Cost and credit Accumulated Depreciation.

Step-by-step explanation:

A. To record the Asset Retirement Obligation (ARO), Wildcat Oil Company would make the following journal entry:

1. Debit ARO Liability: $620,920
2. Credit Asset Retirement Cost: $620,920

B. To record the expense from the asset retirement costs, using the straight-line method, Wildcat would make the following journal entry:

1. Debit Asset Retirement Cost: $200,000 ($1,000,000 / 5 years)
2. Credit Accumulated Depreciation: $200,000

C. To record the accrued interest expense each period, Wildcat would make the following journal entry:

1. Debit Interest Expense: interest amount
2. Credit Accrued Interest Payable: interest amount

D. On Jan. 10, 2019, when Wildcat contracts with Rig Reclaimers, Inc. to dismantle the platform at a contract price of $955,000, Wildcat would make the following journal entry:

1. Debit ARO Liability: $620,920
2. Debit Accumulated Depreciation: $200,000
3. Debit Loss on Settlement: $134,080 ($955,000 - $620,920 - $200,000)
4. Credit Cash: $955,000