You are an in-house staff accountant at Ocean Petroleum, Inc. (OPI), a publicly traded company with a calendar year-end. OPI has recently expanded its land-based operations to include constructing and operating offshore oil platforms. OPIs first offshore platform began operating off the coast of Alaska on January 1, 2017. The total capitalized cost of constructing the platform was $100,000,000 and the deep water drilling rig will be depreciated using straight-line over its useful life of 10 years. As a result of legislation following the 2010 BP oil spill, OPI is required to dismantle and remove the platform at the end of its useful life. OPI currently estimates that it will cost approximately $2,158,932 to dismantle the platform in ten years. OPIs current cost of capital is 8%.

Walt Grimwald, OPIs Chief Financial Officer (CFO), has extensive experience in retail auto dealerships but is new to the oil and gas industry. He is very familiar with car warranties but, as he told you in your meeting with him today, he is unsure how to handle this warranty to dismantle the drilling rig. He has requested you analyze whether OPI must account for this expected future cost in 2017 or at the end of 2026 when the platform will be dismantled.

Grimwald has also expressed concern over making future estimates, especially labor. Even though these estimates are reasonable enough for accounting purposes, it has been Grimwalds experience with auto warranties that estimates are just that estimates. He would prefer not to book any additional expenses in 2017 because OPI is just barely expected to meet Wall Streets earnings forecast. Therefore, he would like to wait until 2026 or some other future year and obtain a more accurate cost of dismantling and removing the platform. Grimwald strongly believes that this will result in more reliable financial statements.

Grimwald would like you to write a short memo explaining your analysis of the issue he has presented to you. Grimwald is data-driven. He likes spreadsheets and is especially fond of journal entries. Therefore, you will need to support your advice with a schedule.