(L03) (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’s useful life.

Instructions

(a) 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.

(b) 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.

(c) 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.