Question

Leaning Tower Inc. developed and operationalized an offshore oil platform on March 1, 2018 at a...

Leaning Tower Inc. developed and operationalized an offshore oil platform on March 1, 2018 at a cost of $10 million. Leaning Tower Inc. is legally required to dismantle and remove the platform at the end of its nine-year useful life. Leaning Tower Inc. estimates that it will cost $1 million to dismantle and remove the platform at the end of its useful life and that the discount rate to use should be 8%. Prepare the entry to record the asset retirement obligation. Assume that none of the $1 million cost relates to production. NOTE: I need to please see the calculations to understand

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Answer #1
Discount Rate 8%
Dismantle and removel Cost $                                 1,000,000.00
Usefull Life 9 Years
Present Value Factor 1/1.08^9 = 0.500248967
0.500248967
Present Value of Dismantle and removel Cost 1000000*0.500248967131459 = $         500,248.97
Debit Credit
Assets $ 500,248.97
Asset retirement obligation $ 500,248.97

Note for your understandings:

The Asset created will be depreciated over the useful life.

At the end of 9 years when the retirement obligation will arise then the liability created will be reversed.

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