Problem $1$

Shell built an oil rig at a cost of $$4\mathrm{.}5$ million. The company estimates the oil rig will have a useful life of $20$ years $($with no salvage value$),$ after which Federal regulations require that the oil rig must be dismantiled and the land area restored at an expected fair value of $$1\mathrm{.}3$ million. The present value of these asset retirement costs is $$4,00,000$ based on the $6\%$ after$-$tax discount rate. The company follows U$.$S$.$ GAAP.

a$.$ Prepare the joumal entry prepared at the completion of construction to value the oil rig.

b$.$ Prepare the journal entry to record the annual increase in the carrying value of the liability.

c$.$ At the end of $20$ years, the company dismantles the oil rig and restores the land area at a cost of $$1\mathrm{.}5$ million. Prepare the joumal entry to record payment of the settlement costs in cash.