Lifeline biofuels built an oil rig at a cost of $4.5 million. At the time that construction was complete, the company estimated the oil rig would have a useful life of 20 years (with no salvage value), after which Federal regulations would require that the oil rig be dismantled and the land area restored. The fair value of this asset retirement project was $830,000 and the present value of these asset retirement costs was $123,000 based on the 10% after-tax discount rate. At the end the the 20 year life, the company dismantles the oil rig and restores the land at a cost of $905,000. Following U.S. GAAP, the journal entry to record the completion of the resoration process would include: a: credit Loss on Settlemebnt of Asset Retirement Obligation for $782,00 b: debit Loss on Settlement of Asset Retirement Obligation for $75,000 c: credit Asset Retirement Obligation for $75,000 d: debit Loss on Settlement of Asset Retirement Obligation for $782,000 The answer is b but how is it calculated and how do you know that it's a debit Loss?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Lifeline biofuels built an oil rig at a cost of $4.5 million. At the time that construction was complete, the company estimated the oil rig would have a useful life of 20 years (with no salvage value), after which Federal regulations would require that the oil rig be dismantled and the land area restored. The fair value of this asset retirement project was $830,000 and the present value of these asset retirement costs was $123,000 based on the 10% after-tax discount rate. At the end the the 20 year life, the company dismantles the oil rig and restores the land at a cost of $905,000. Following U.S. GAAP, the
a: credit Loss on Settlemebnt of Asset Retirement Obligation for $782,00
b: debit Loss on Settlement of Asset Retirement Obligation for $75,000
c: credit Asset Retirement Obligation for $75,000
d: debit Loss on Settlement of Asset Retirement Obligation for $782,000
The answer is b but how is it calculated and how do you know that it's a debit Loss?
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