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Asset Retirement Obligation Journal Entries

Burns Company purchase an oil tanker depot on Jan 1,2012 at a cost of 600,000. They expect to operate the depot for 10 years at which time it is legally require to dismantle the depot and remove the underground storage tanks. It is estimated that it will cost 70,000 to dismantle the depot and remove the tanks at the end of the depot useful life.

(a) Prepare the journal entries to record the depot (consider a plant asset) and the asset retirement obligation for the depot on Jan 1, 2012. Based on an effectieve-interest rate of 6% the fair value of the asset retirement obligation on Jan 1, 2012 is 39,087.
(b) Prepare any journal entries required for the depot and the asset retirement obligation at Dec 31, 2012. Jones uses straight line depreciation. The estimated residual value for the depot is zero.
(c) On Dec 31,2012 Jones pays a demolition firm to dismantle the depot and remove the tanks at a price 80,000. Prepare the journal entry for the settlement of the asset retirement obligation.

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Solution Preview

(A) This comes out of cash since it was a purchase and not stated that it was paid for with a loan. The 6% doesn't matter in this part, even though it is included in the question. We don't need it until the ...

Solution Summary

This solution explains the journal entries needed for Burns Company. All calculations, entries, and explanations are provided.