Crude Oil Limited purchased an oil tanker depot on July 2, 2020 at a cost of $600,000

Question:

Crude Oil Limited purchased an oil tanker depot on July 2, 2020 at a cost of $600,000 and expects to operate the depot for 10 years. After the 10 years, Crude Oil is legally required to dismantle the depot and remove the underground storage tanks. It is estimated that it will cost $75,000 to do this at the end of the depot's useful life. Crude Oil follows ASPE. 


Instructions 

a. Calculate the present value of the asset retirement obligation (that is, its fair value) on the date of acquisition, based on an effective interest rate of 6%. Prepare the journal entries to record the acquisition of the depot and the accrual for the asset retirement obligation for the depot on July 2, 2020. Use (1) factor Table A.2, (2) a financial calculator, or (3) Excel function PV in your calculations. 

b. Prepare any journal entries required for the depot and the asset retirement obligation at December 31, 2020. Crude Oil uses straight-line depreciation. The estimated residual value of the depot is zero. 

c. Show how all relevant amounts will be reported on Crude Oil Limited's financial statements at December 31, 2020. 

d. Prepare the schedule to calculate the balance in the Asset Retirement Obligation account for all years from 2020 to 2030, assuming there is no change in the estimated cost of dismantling the depot. 

e. On June 30, 2030, Crude Oil pays a demolition firm to dismantle the depot and remove the tanks at a cost of $80,000. Prepare the journal entry for the settlement of the asset retirement obligation. 

f. How would the accretion expense be reported on the statement of cash flows? 

g. Discuss how Crude Oil would account for the asset retirement costs and obligation if the company reported under IFRS. Be specific. 


Table A.2

PVF= (1+i) (1+i) (n) periods 2% 3% 4% 5% 6% 8% 9% 10% 11% 12% 15% 98039 96117 94232 92385 97561 .95238 91743 90909 90090 86957 97087 94260 .91514 96156 .92456 88900 85480 82193 94340 89000 83962 79209 74726 92593 85734 79383 73503 68058 89286 79719 95181 92860 90595 88385

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Related Book For  book-img-for-question

Intermediate Accounting Volume 2

ISBN: 9781119497042

12th Canadian Edition

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Irene M. Wiecek, Bruce J. McConomy

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