Sheridan Processes is involved with innovative approaches to finding energy reserves. Sheridan recently built a facility to extract natural gas at a cost of $12.8 million. However, Sheridan is also legally responsible to remove the facility at the end of its useful life of twenty years. This cost is estimated to be $16 million (the present value of which is $6.3 million). What is the journal entry required to record the asset retirement obligation?

Debit Natural Gas Facility for $16000000 and credit Asset Retirement Obligation for $16000000.

Debit Natural Gas Facility for $6300000 and credit Asset Retirement Obligation for $6300000.

No journal entry required.

Debit Natural Gas Facility for $3200000 and credit Asset Retirement Obligation for $3200000.

Please explain the calculation