Tadpole Oil and Gas Company completes construction of an offshore oil platform and places it into service on January 1, 2018. Tadpole is legally required to

dismantle and remove the platform at the end of its useful life, which is estimated to be 10 years. On January 1, 2018, Tadpole recognized a liability for an asset

retirement obligation and capitalized an amount for an asset retirement cost. It estimated the intial fair value of the liability using an expected present value

technique. The significant assumptions used in that estimate of fair value are as follows:

a.

Labor costs are based on current marketplace wages required to hire contractors to dismantle and remove offshore oil platforms. Tadpole

assigns probability assessments to a range of cash flow estimates as follows:

Cash Flow Estimate

Probability Assessment

250,000

10%

175,000

60%

200,000

30%

b.

Tadpole estimates allocated overhead and equipment charges using the rate it applies to labor costs for transfer pricing (60%). The entity has no

reason to believe that its overhead and equipment rate differs from that used by contractors in the industry.

c.

A contractor typically adds a markup on labor, allocated internal costs, and equipment to provide a profit margin on the job. The entity determines

the profit that contractors in the industry generally earn to dismantle and remove offshore oil platforms is 15%.

d.

A contractor would typically demand and receive a premium (market risk premium) for bearing the uncertainty and unforeseeable cirumstances

inherent in "locking in" today's price for a project that will not occur for 10 years. The entity estimates the amount of that premium to be 5% of the

estimated inflation adjusted cash flows.

e.

The risk free rate of interest on January 1, 2015 is 6%. The entity adjusts that rate by 4% to reflect the effect of its credit standing. Therefore, the credit

adjusted risk free rate used to compute expected present value is 10%. (Round the present value factor to four decimal places)

a.

Complete the follwing tables:

Cash Flow Estimate

Probability Assessment

Expected Cash Flow

250000

10%

175000

60%

200000

30%

Initial Measurement of the ARO Liability at January 1, 2018

Expected Cash Flows 1/1/18

Expected labor costs

Allocated overhead and equipment charges

Contractors markup

Expected cash flows before inflation adjustment

Inflaition factor assuming 4% rate for 10 years

Expected cash flows adjusted for inflation

Market risk premium

Expected cash flows adjusted for market risk

Present value using credit adjusted risk free rate of 10% for 10 years

Accretion: Interest Method of Allocation

Schedule of Expenses

Year

Accretion

Liability Balance

Year End

Accrection Expense

DD&A Expense

1/1/2018

2018

12/31/2018

2019

12/31/2019

2020

12/31/2020

2021

12/31/2021

2022

12/31/2022

2023

12/31/2023

2024

12/31/2024

2025

12/31/2025

2026

12/31/2026

2027

12/31/2027

b.

Prepare the journal entry that would be made on January 1, 2018 to record the asset retirement obligation.

c.

Prepare the journal entries that would be made from December 31, 2018, to December 31, 2027 to record the accretion

expense and the amortization expense related to the ARO.

d.

On December 31, 2027, the entity settles its asset retirement obligation by using its internal workforce at a cost of $432,000.

Assume no changes during the 10 year period in the cash flows used to estimate the obligation. Prepare the journal entry that

would be made on December 31, 2017 to record the settlement of the asset retirement obligation.

Tadpole Oil and Gas Company completes construction of an offshore oil platform and places it into service on January 1, 2018. Tadpole is legally required to
dismantle and remove the platform at the end of its useful life, which is estimated to be 10 years. On January 1, 2018, Tadpole recognized a liability for an asset
retirement obligation and capitalized an amount for an asset retirement cost. It estimated the intial fair value of the liability using an expected present value
technique. The significant assumptions used in that estimate of fair value are as follows:
a.	Labor costs are based on current marketplace wages required to hire contractors to dismantle and remove offshore oil platforms. Tadpole
	assigns probability assessments to a range of cash flow estimates as follows:
	Cash Flow Estimate	Probability Assessment
	250,000	10%
	175,000	60%
	200,000	30%
b.	Tadpole estimates allocated overhead and equipment charges using the rate it applies to labor costs for transfer pricing (60%). The entity has no
	reason to believe that its overhead and equipment rate differs from that used by contractors in the industry.
c.	A contractor typically adds a markup on labor, allocated internal costs, and equipment to provide a profit margin on the job. The entity determines
	the profit that contractors in the industry generally earn to dismantle and remove offshore oil platforms is 15%.
d.	A contractor would typically demand and receive a premium (market risk premium) for bearing the uncertainty and unforeseeable cirumstances
	inherent in "locking in" today's price for a project that will not occur for 10 years. The entity estimates the amount of that premium to be 5% of the
	estimated inflation adjusted cash flows.
e.	The risk free rate of interest on January 1, 2015 is 6%. The entity adjusts that rate by 4% to reflect the effect of its credit standing. Therefore, the credit
	adjusted risk free rate used to compute expected present value is 10%. (Round the present value factor to four decimal places)
a.	Complete the follwing tables:
	Cash Flow Estimate	Probability Assessment	Expected Cash Flow
	250000	10%
	175000	60%
	200000	30%
	Initial Measurement of the ARO Liability at January 1, 2018
					Expected Cash Flows 1/1/18
	Expected labor costs
	Allocated overhead and equipment charges
	Contractors markup
	Expected cash flows before inflation adjustment
	Inflaition factor assuming 4% rate for 10 years
	Expected cash flows adjusted for inflation
	Market risk premium
	Expected cash flows adjusted for market risk
	Present value using credit adjusted risk free rate of 10% for 10 years
	Accretion: Interest Method of Allocation					Schedule of Expenses
	Year	Accretion	Liability Balance			Year End	Accrection Expense	DD&A Expense
	1/1/2018					2018
	12/31/2018					2019
	12/31/2019					2020
	12/31/2020					2021
	12/31/2021					2022
	12/31/2022					2023
	12/31/2023					2024
	12/31/2024					2025
	12/31/2025					2026
	12/31/2026					2027
	12/31/2027
b.	Prepare the journal entry that would be made on January 1, 2018 to record the asset retirement obligation.
c.	Prepare the journal entries that would be made from December 31, 2018, to December 31, 2027 to record the accretion
	expense and the amortization expense related to the ARO.
d.	On December 31, 2027, the entity settles its asset retirement obligation by using its internal workforce at a cost of $432,000.
	Assume no changes during the 10 year period in the cash flows used to estimate the obligation. Prepare the journal entry that
	would be made on December 31, 2017 to record the settlement of the asset retirement obligation.