On January 1, 2017, Offshore Corporation erected a drilling platform at a cost of $5,460,000. Offshore is legally required to dismantle and remove the platform at the end of its six-year useful life, at an estimated cost of $950,000. Offshore estimates that 70% of the cost of dismantling and removing the platform is caused by acquiring the asset itself, and that the remaining 30% of the cost is caused by using the platform in production. The present value of the increase in asset retirement obligation related to the production of oil in 2017 and 2018 was $32,328 and $34,914, respectively. The estimated residual value of the drilling platform is zero, and Offshore uses straight-line depreciation. Offshore prepares financial statements in accordance with IFRS.
Instructions
(a) Prepare the journal entries to record the acquisition of the drilling platform, and the asset retirement obligation for the platform, on January 1, 2017. An appropriate interest or discount rate is 8%.
(b) Prepare any journal entries required for the platform and the asset retirement obligation at December 31, 2017.
(c) Prepare any journal entries required for the platform and the asset retirement obligation at December 31, 2018.
(d) Assume that on December 31, 2022, Offshore dismantles and removes the platform for a cost of $922,000. Prepare the journal entry to record the settlement of the asset retirement obligation. Also assume its carrying amount at that time is $950,000.
(e) Repeat parts (a) through (d) assuming that Offshore prepares financial statements in accordance with ASPE.