QUESTION 3 (12 MARKS)

On July 1, 2022, Offshore Corporation erected a drilling platform at a cost of $25 million. Offshore is legally required to dismantle and remove the platform at the end of its 10-year useful life, at an estimated cost of $2,500,000.

The estimated residual value of the drilling platform is $1,000,000 and Offshore records depreciation under the straight-line method.

Offshore prepares financial statements in accordance with IFRS and has a December 31 year-end. Its risk-adjusted borrowing rate is 7%. The risk-free rate is 5%.

Required:

1. a) Prepare journal entries to record the acquisition of the drilling platform and the decommissioning obligation on July 1, 2022. (3 marks)

1. b) Calculate the annual depreciation amount for the drilling platform. (2 marks)

1. c) Prepare the adjusting entries required for the year ended December 31, 2022. (3 marks)

1. d) Assume that at the end of July 2032, Offshore incurred costs of $2,700,000 to dismantle the drilling platform. Assume further that the decommissioning obligation was not revised over the years. Prepare the journal entry to record the decommissioning of the platform. (2 marks)

1. e) Assume Offshore prepares its financial statements under ASPE. What is the amount at which it would initially record the asset retirement obligation for the drilling platform? (2 marks)