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Chapter 13: 14E (page 658)

(Asset Retirement Obligation) Oil Products Company purchases an oil tanker depot on January 1, 2017, at a cost of \(600,000. Oil Products expects to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove the underground storage tanks. It is estimated that it will cost \)75,000 to dismantle the depot and remove the tanks at the end of the depot鈥檚 useful life.

Instructions

  1. Prepare the journal entries to record the depot and the asset retirement obligation for the depot on January 1, 2017. Based on an effective-interest rate of 6%, the present value of the asset retirement obligation on January 1, 2017, is \(41,879.
  2. Prepare any journal entries required for the depot and the asset retirement obligation at December 31, 2017. Oil Products uses straight-line depreciation; the estimated salvage value for the depot is zero.
  3. On December 31, 2026, Oil Products pays a demolition firm to dismantle the depot and remove the tanks at a price of \)80,000. Prepare the journal entry for the settlement of the asset retirement obligation.

Short Answer

Expert verified
  1. Both sides of the journal totals$641,879.
  2. Both sides of the journal totals$66,701.
  3. Loss on settlement is$5,000.

Step by step solution

01

Definition of Asset Retirement Obligation

The obligations that a business entity is required to fulfill against the retirement of the intangible and plant assets held in the business are known as asset retirement obligations.

02

Journal entries to record the depot and asset retirement obligation for the depot on January 1, 2017

Date

Accounts and Explanation

Debit $

Credit $

1

Plant assets

$600,000

Cash

$600,000

2

Plant asset

$41,879

Asset retirement obligation

$41,879

$641,879

$641,879

03

Journal entries to record the depot and asset retirement obligation at 31 December 2017

Date

Accounts and Explanation

Debit $

Credit $

1

Depreciation expenses$600,00010

$60,000

Accumulated depreciation

$60,000

2

Depreciation expenses$41,87910

$4,188

$4,188

Accumulated depreciation

3

Interest expenses$41,879脳6%

$2,513

Asset retirement obligation

$2,513

$66,701

$66,701

04

Journal entry for settlement of the asset retirement obligation

Date

Accounts and Explanation

Debit $

Credit $

1

Asset retirement obligation

$75,000

Loss on ARO settlement

$5,000

Cash

$80,000

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Most popular questions from this chapter

Question: On October 15, 2017, Oil Products Co. purchased 4,000 barrels of fuel oil with a cost of

\(240,000 (\)60 per barrel). Oil Products is holding this inventory in anticipation of the winter 2018 heating season. Oil Products

accounts for its inventory at the lower-of-FIFO-cost-or-net realizable value. To hedge against potential declines in the value of

the inventory, Oil Products also purchased a put option on the fuel oil. Oil Products paid an option premium of \(300 for the put

option, which gives Oil Products the option to sell 4,000 barrels of fuel oil at a strike price of \)60 per gallon. The option expires

on March 1, 2018. The following data are available with respect to the values of the fuel of inventory and the put option.

Date Market Price of Fuel Oil Time Value of Put Option

October 31, 2017 \(58 per gallon \)175

November 30, 2017 57 per gallon 105

December 31, 2017 54 per gallon 40

Instructions

(a) Prepare the journal entries of Oil Products for the following dates.

(1) October 15, 2017鈥擮il Products purchases fuel oil and the put option on fuel oil.

(2) October 31, 2017鈥擮il Products prepares financial statements.

(3) November 30, 2017鈥擮il Products prepares financial statements.

(4) December 31, 2017鈥擮il Products prepares financial statements.

(b) Indicate the amount(s) reported on the balance sheet and income statement related to the fuel oil inventory and the put

option on November 30, 2017.

(c) Indicate the amount(s) reported on the balance sheet and income statement related to the fuel oil and the put option on

December 31, 2017.

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Prepare the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company

in 2017.

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for \(400,000 and, at the end of 2017, have a remaining life of 3 years with annual interest payments at 10%, paid at the end of each year. This debt investment is classified as held-for-collection. Keune is facing a tough economical environment and informs all of its investors that it will be unable to make all payments according to the contractul terms. The controller of Komissarov has prepared the following revised expected cash flow forecast for this bond investment.

December 31, Expected cash flows

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2019 35,000

2020 385,000

Total cash flows $455,000

Instructions

(a) Determine the impairement loss for Komissarov at December31, 2017.

(b) Prepare the entry to record the impairement loss for Komissarov at Decembber 31, 2017.

(c) On January 15, 2018, Keune receives a major capiatl infusion from a private equity investor. It informs Komissarov that the bonds now will be paid according to the contractual terms. Briefly describe how the Komissarov would account for the bond investment in light of this new information.

Question: (Cash Flow Hedge) LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will

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To hedge the risk of increased gold prices, on April 1, 2017, LEW enters into a gold futures contract and designates this

futures contract as a cash flow hedge of the anticipated gold purchase. The notional amount of the contract is 500 ounces, and

the terms of the contract give LEW the right and the obligation to purchase gold at a price of \(300 per ounce. The price will be

good until the contract expires on October 31, 2017.

Assume the following data with respect to the price of the futures contract and the gold inventory purchase:

Date Spot Price for October Delivery

April 1, 2017 \)300 per ounce

June 30, 2017 310 per ounce

September 30, 2017 315 per ounce

Instructions

Prepare the journal entries for the following transactions.

(a) April 1, 2017鈥擨nception of the futures contract, no premium paid.

(b) June 30, 2017鈥擫EW Co. prepares financial statements.

(c) September 30, 2017鈥擫EW Co. prepares financial statements.

(d) October 10, 2017鈥擫EW Co. purchases 500 ounces of gold at \(315 per ounce and settles the futures contract.

(e) December 20, 2017鈥擫EW sells jewelry containing gold purchased in October 2017 for \)350,000. The cost of the finished

goods inventory is $200,000.

(f) Indicate the amount(s) reported on the balance sheet and income statement related to the futures contract on June 30, 2017.

(g) Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions

on December 31, 2017.-

(Premium Entries) No Doubt Company includes 1 coupon in each box of soap powder that it packs, and 10 coupons are redeemable for a premium (a kitchen utensil). In 2017, No Doubt Company purchased 8,800 premiums at 80 cents each and sold 110,000 boxes of soap powder at $3.30 per box; 44,000 coupons were presented for redemption in 2017. It is estimated that 60% of the coupons will eventually be presented for redemption.

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Prepare all the entries that would be made relative to sales of soap powder and to the premium plan in 2017.
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