Question

The TSU Oil Company has property that will be abandoned in 20 years. On April 1, 2020, It is estimated that it will cost $20 million dollars to restore the property. The borrowing rate is 6% to fund the obligation . The PV factor at 6 % and 20 years is.31180 . What is the Journal entry on April 1, 2020, to record the retirement Obligation in the current period Under both GAAP and IFRS ?

Answer 1

property 6,236,000 debit

retirement obligation liaiblity 6,236,000‬ credit

Step-by-step explanation:

The liability will be reported at their discounted expected value

therefore we multiply the 20,000,000 expected erogation in 20 years by the PV factor of 6% in 20 years:

20,000,000 x 0.31180 = 6,236,000‬

As this is a cost associate with the possesion of the property it will be considerd part of the cost to obtain it.