Sheridan Gas Co. purchases a gas station and convenience store on January 1, 2017, at a cost of $665,000. Sheridan expects to operate the store and gas station for 20 years. The company is legally required to remove the underground gas storage tanks from the facility at the end of its useful life. Sheridan estimates that it will cost $91,000 to remove the tanks at the end of the facility’s useful life.     Prepare the journal entries to record the purchase of the gas station/convenience store, as well as the asset retirement obligation for the gas station/convenience store on January 1, 2017. Based on an effective-interest rate of 8%, the present value of the asset retirement obligation on January 1, 2017, is $19,567.

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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.