Question

Larkspur Company purchases an oil tanker depot on January 1, 2017, at a cost of $609,900. Larkspur expects to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove the underground storage tanks. It is estimated that it will cost $71,760 to dismantle the depot and remove the tanks at the end of the depot’s useful life. Prepare the journal entries to record the depot (considered a plant asset) and the asset retirement obligation for the depot on January 1, 2017. Based on an effective-interest rate of 6%, the present value of the asset retirement obligation on January 1, 2017, is $40,070. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit January 1, 2017 (To record the depot) January 1, 2017 (To record the asset retirement obligation) Prepare any journal entries required for the depot and the asset retirement obligation at December 31, 2017. Larkspur uses straight-line depreciation; the estimated salvage value for the depot is zero. (Round answers to 0 decimal places, e.g. 5,275. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit December 31, 2017 (To record depreciation for the depot) December 31, 2017 (To record depreciation on asset retirement obligation) December 31, 2017 (To record interest on asset retirement obligation) On December 31, 2026, Larkspur pays a demolition firm to dismantle the depot and remove the tanks at a price of $75,940. Prepare the journal entry for the settlement of the asset retirement obligation. (Round answers to 0 decimal places, e.g. 5,275. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit December 31, 2026

Answer 1

Answer

A.

Journal entries:

Date	Particulars	Dr	Cr
Jan 1, 2017	Depot	$609,900
	Cash		$609,900
	Depot	$40070
	Asset Retirement Obligation		$40070

B.

Journal entries:

Date	Particulars	Dr	Cr
Dec 31, 2017	Depreciation Expense(609900 / 10)	$60990
	Accumulated Depreciation		$60990
	Depreciation Expense(40070 / 10)	$4007
	Accumulated Depreciation		$4007
	Interest Expense	$2400
	Asset Retirement Obligation		$2400
	(400070*6% = 2400)

3.Journal entries:

Date	Particulars	Dr	Cr
December 31, 2026	Asset Retirement Obligation	$71,760
	Loss on ARO Settlement	$4180
	Cash		$75940