On January 1 of the current year, Wright Oil invested $ 7,500,000 to construct an offshore oil platform, and paid cash. As part of its offshore drilling agreement, Wright is responsible for dismantling and removing the platform at the end of its 15- year useful life. Wright depreciates the platform by using the straight- line method with no residual value expected at the end of its useful life. The asset did not have a reasonably determinable quoted market price and market comparables are not available. As a result, Wright decided to use a probability- based estimate of the cost of dismantling and removing the platform to estimate the fair value of the retirement obligation. The probability- based estimate employs the expected cash flows needed to comply with the offshore drilling agreement based on costs of dismantling and removal in today’s market. The estimated values are as follows:
Estimated Future Cash Flows Probability of Occurrence
$ 675,000 …………………………………..62%
$ 890,000 …………………………………..30%
$ 1,021,100 ………………………………….. 8%
The company’s estimated cost of capital is 6%.
Required
a. Prepare the journal entries required to record the investment in the offshore oil platform.
b. Prepare the journal entry to record the first year’s depreciation and accretion accrual.
c. Prepare the journal entries required to record the disposal of the asset and the settlement of the asset retirement obligation at the end of the eighth year after acquisition. Wright sold the asset for $ 980,000 and the costs of dismantling and removing the offshore oil platform totaled $ 1,200,000.