Question

Calaf’s Drillers erects and places into service an off-shore oil platform on January 1, 2018, at a cost of \(10,000,000. Calaf is legally required to dismantle and remove the platform at the end of its useful life in 10 years. Calaf estimates it will cost \)1,000,000 to dismantle and remove the platform at the end of its useful life in 10 years. (The fair value at January 1,2018, of the dismantle and removal costs is $450,000.) Prepare the entry to record the asset retirement obligation

Short answer

Oil Platform will be debited and Asset Retirement Obligation will be credited by $450,000, respectively.

Step-by-step solution

Explanation of asset retirement obligation

Company is required to record the asset retirement obligation, also known as ARO, in case there is legal liability for the retirement of an asset, and the disposal amount is reasonably estimated. This disposal or removal cost is recorded at fair value.

Journal entry

Date	Accounts & Explanations	Debit	Credit
Jan. 1, 2018	Oil Platform	$450,000
	Asset Retirement Obligation		$450,000
	To record asset retirement obligation