Sarasota Company purchases an oil tanker depot on January 1, 2020, at a cost of $575,800. Coronado expects to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove the underground storage tanks. It is estimated that it will cost $71,760 to dismantle the depot and remove the tanks at the end of the depot's useful life.

Required:

Prepare the journal entries to record the depot (considered a plant asset) and the asset retirement obligation for the depot on January 1, 2017. Based on an effective-interest rate of 6%, the present value of the asset retirement obligation on January 1, 2017, is $40,070.

Question

Kaylie Chambers

Business

20 April, 17:09

Sarasota Company purchases an oil tanker depot on January 1, 2020, at a cost of $575,800. Coronado expects to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove the underground storage tanks. It is estimated that it will cost $71,760 to dismantle the depot and remove the tanks at the end of the depot's useful life.

Required:

Prepare the journal entries to record the depot (considered a plant asset) and the asset retirement obligation for the depot on January 1, 2017. Based on an effective-interest rate of 6%, the present value of the asset retirement obligation on January 1, 2017, is $40,070.

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Answers (1)

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Kamila · Answer 1

As per the IAS-16 the cost of dismantling the asset will be capitalized at present value and will be included in the cost of asset and provision for the dismantling future liability will be created at present vale of the liability i. e 40070.

Entries

Asset (575800+40070) 615870

Bank 575800

Provision for Dismantling cost 40070