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Chapter 13: 12BE (page 658)

Calaf鈥檚 Drillers erects and places into service an off-shore oil platform on January 1, 2018, at a cost of \(10,000,000. Calaf is legally required to dismantle and remove the platform at the end of its useful life in 10 years. Calaf estimates it will cost \)1,000,000 to dismantle and remove the platform at the end of its useful life in 10 years. (The fair value at January 1,2018, of the dismantle and removal costs is $450,000.) Prepare the entry to record the asset retirement obligation

Short Answer

Expert verified

Oil Platform will be debited and Asset Retirement Obligation will be credited by $450,000, respectively.

Step by step solution

01

Explanation of asset retirement obligation

Company is required to record the asset retirement obligation, also known as ARO, in case there is legal liability for the retirement of an asset, and the disposal amount is reasonably estimated. This disposal or removal cost is recorded at fair value.

02

Journal entry

Date

Accounts & Explanations

Debit

Credit

Jan. 1, 2018

Oil Platform

$450,000

Asset Retirement Obligation

$450,000

To record asset retirement obligation

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Most popular questions from this chapter

Define a provision, and give three examples of a provision.

(Available-for-Sale and Held-to-Maturity Debt Securities Entries) The following information relates to the debt

securities investments of Wildcat Company.

1. On February 1, the company purchased 10% bonds of Gibbons Co. having a par value of \(300,000 at 100 plus accrued interest.

Interest is payable on April 1 and October 1.

2. On April 1, semiannual interest is received

3. On July 1, 9% of bonds of Sampson, Inc. were purchased. These bonds with a par value of \)200,000 were purchased at 100

plus accrued interest. Interest dates are June 1 and December 1.

4. On September 1, bonds with a par value of $60,000, purchased on February 1, are sold at 99 plus accrued interest.

5. On October 1, semiannual interest is received.

6. On December 1, semiannual interest is received.

7. On December 31, the fair value of the bonds purchased February 1 and July 1 were 95 and 93, respectively.

Instructions

(a) Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are

available-for-sale securities.

(b) If Wildcat classified these as held-to-maturity investments, explain how the journal entries would differ from those in part (a).

Carow Corporation purchased, as a held-for-collection investment, \(60,000 of the 8%, 5-year bonds of Harrison, Inc.

for \)65,118, which provides a 6% return. The bonds pay interest semiannually. Prepare Carow鈥檚 journal entries for (a) the purchase

of the investment, and (b) the receipt of semiannual interest and premium amortization

Question: When should liabilities for each of the following items be recorded on the books of an ordinary business corporation?

  1. Acquisition of goods by purchase on credit.
  2. Officers鈥� salaries.
  3. Special bonus to employees.
  4. Dividends.
  5. Purchase commitments.

Question: The presentation of current and non-current liabilities in the statement of financial position (balance sheet):

  1. is shown only on GAAP financial statements.
  2. is shown on both a GAAP and an IFRS statement of financial position.
  3. is always shown with current liabilities reported first in an IFRS statement of financial position.

(d)includes contingent liabilities under IFRS.
See all solutions

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