Reference no: EM132726898
Question - Canacol Oil Ltd. is a private oil start-up company that follows ASPE. Canacol is legally required to dismantle and remove its oil platform at the end of its five-year useful life. The total cost of dismantling and removal is estimated to be $1 million. Based on a 10% discount rate, the present value of the asset retirement obligation (ARO) is $620,920 ($1,000,000 × 0.62092). Only 80% of the $1-million ARO estimate is caused by the asset acquisition itself. On December 31, 2020, Canacol estimates that the increase in the ARO in 2020 due to the production of oil in 2020 was $136,602. On January 10, 2025, Canacol spends $995,000 on dismantling the platform.
Requirements -
1. Prepare the journal entries for initial recognition of ARO, and for the change to ARO cost related to production at the end of 2020.
2. Assuming that the straight-line depreciation method is used to record depreciation relating to the retirement cost over the asset's useful life. Prepare journal entry for depreciation expense relating to the retirement cost for 2020 and 2021, and show your calculation.
3. How the interest relating to the ARO of Canacol should be accounted for? Provide the journal entry for recording the interest up to December 21, 2021, and show the calculation.
4. Provide the journal entry for dismantling of the drilling platform in 2025.
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