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Chapter 13: Q12BE (page 692)

Calaf鈥檚 Drillers erects and places into service an off-shore oil platform on January 1, 2018, at a cost of \(10,000,000. Calaf is legally required to dismantle and remove the platform at the end of its useful life in 10 years. Calaf estimatesit will cost \)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 on asset retirement obligation

Company is required to record the asset retirement obligation, also known as ARO, in case there is legal liability for retirement of 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

Question: E13-1 (L01) (Balance Sheet Classification of Various Liabilities) How would each of the following items be reported on the balance sheet? (a) Accrued vacation pay. (j) Premium offers outstanding. (b) Estimated taxes payable. (k) Discount on notes payable. (c) Service warranties on appliance sales. (l) Personal injury claim pending. (d) Bank overdraft. (m) Current maturities of long-term debts to be paid (e) Employee payroll deductions unremitted. from current assets. (f) Unpaid bonus to officers. (n) Cash dividends declared but unpaid. (g) Deposit received from customer to guarantee (o) Dividends in arrears on preferred stock. performance of a contract. (p) Loans from officers. (h) Sales taxes payable. (i) Gift certificates sold to customers but not yet redeemed.

How does unearned revenue arise? Why can it be classified properly as a current liability? Give several examples of business activities that result in unearned revenues.

CA13-7 ETHICS (Warranties) The Dotson Company, owner of Bleacher Mall, charges Rich Clothing Store a rental fee of \(600 per month plus 5% of yearly profits over \)500,000. Matt Rich, the owner of the store, directs his accountant, Ron Hamilton, to increase the estimate of bad debt expense and warranty costs in order to keep profits at $475,000.

Instructions

Answer the following questions.

(a) Should Hamilton follow his boss鈥檚 directive?

(b) Who is harmed if the estimates are increased?

(c) Is Matt Rich鈥檚 directive ethical?

Indicate how unrealised holding gains and losses should be reported for investments classified as trading and held-for-collection.

Identify and explain the different types of classifications for investments in equity securities.
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