Exercise 13-15

On January 1, 2020, Ayayai Corporation erected a drilling platform at a cost of $5,787,600. Ayayai is legally required to dismantle and remove the platform at the end of its 6 year useful life, at an estimated cost of $1,007,000. Ayayai estimates that 70% of the cost of dismantling and removing the platform is caused by acquiring the asset itself, and that the remaining 30% of the cost is caused by using the platform in production. The present value of the increase in asset retirement obligation related to the production of oil in 2020 and 2021 was $34,268 and $37,009, respectively. The estimated residual value of the drilling platform is zero, and Ayayai uses straight-line depreciation. Ayayai prepares financial statements in accordance with IFRS.

A.) Prepare the journal entries to record the acquisition of the drilling platform, and the asset retirement obligation for the platform, on January 1, 2020. An appropriate interest or discount rate is 8%. Use (1) factor Table A.2, (2) a financial calculator, or (3) Excel function PV in your calculations. (Hint:For a review of present value concepts, see Chapter 3 of Volume 1.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1st, 2020
	To record the cost of drilling platform
Jan. 1st, 2020
	To recognize the retirement liability

B.) Prepare any journal entries required for the platform and the asset retirement obligation at December 31, 2020.

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2020
	To record depreciation expense
Dec. 31, 2020
	To record interest expense
Dec. 31
	To record production of oil inventory

C.) Prepare any journal entries required for the platform and the asset retirement obligation at December 31, 2021.

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2021
	To record depreciation expense
Dec. 31, 2021
	To record interest expense
Dec. 31, 2021
	To record production of oil inventory

D.) Assume that on December 31, 2025, Ayayai dismantles and removes the platform at a cost of $977,320. Prepare the journal entry to record the settlement of the asset retirement obligation. Also assume its carrying amount at that time is $1,007,000.

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2025

E.) Prepare the journal entries to record the acquisition of the drilling platform, and the asset retirement obligation for the platform, on January 1, 2020, assuming that Ayayai prepares financial statements in accordance with ASPE. An appropriate interest or discount rate is 8%.

Date	Account Titles and explanation	Debit	Credit
Jan. 1, 2020
	To record the cost of drilling platform
Jan. 1, 2020
	To recognize the retirement liability

F.) Prepare any journal entries required for the platform and the asset retirement obligation at December 31, 2020, assuming that Ayayai prepares financial statements in accordance with ASPE.

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2020
	To record depreciation expense
Dec. 31, 2020
	To record accretion expense
Dec. 31, 2020
	To adjust asset retirement obligation

G.) Prepare any journal entries required for the platform and the asset retirement obligation at December 31, 2021, assuming that Ayayai prepares financial statements in accordance with ASPE.

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2021
	To record depreciation expense
Dec. 31, 2021
	To record accretion expense
Dec. 31, 2021
	To adjust asset retirement obligation

H.) Assume that on December 31, 2025, Ayayai dismantles and removes the platform for a cost of $977,320. Prepare the journal entry to record the settlement of the asset retirement obligation, assuming that Ayayai prepares financial statements in accordance with ASPE. Also assume its carrying amount at that time is $1,007,000.

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2025

(Account Possibilities for all parts of question: Accounts Receivable, Interest Payable, Accounts Payable, Interest Expense, Accretion Expense, Asset Retirement Obligation, Drilling Platform, Cash, Depreciation Expense, No Entry, Accumulated Depreciation - Drilling Platform, Gain on Settlement of Asset Retirement Obligation, Loss on settlement of Asset Retirement Obligation, Inventory)