Pete’s Petroleum, Inc., an SEC registrant with a calendar year-end, is in the business of constructing and operating offshore oil platforms. Pete’s Petroleum is required legally to dismantle and remove the platforms at the end of their useful lives, which is estimated to be 10 years. On January 1, 2016, Pete constructed and began operating an offshore oil platform off the coast of Brazil. The total capitalized cost to construct the platform was $ 3,700,000. In addition, while the future cost of dismantling the oil platform is difficult to estimate, Pete believes there is a 40% chance that the future cost will be $ 1,425,000, a 40% chance it will be $ 1,650,000, and a 20% chance that it will cost $ 2,125,000. The appropriate discount rate is 12%, and Pete uses the straight- line method of depreciation.
1. Prepare the journal entries that Pete should record in 2016 related to the oil platform.
2. Prepare an amortization schedule for the asset retirement obligation.
3. Next Level Prepare a table showing the effect of accounting for the asset retirement obligation on assets, liabilities, shareholders’ equity, and net income relative to accounting for the associated costs at the end of the asset’s service life when the expenditure is made.