Question

Gogo Gasoline installed three new underground storage tanks at one of its gas stations on January 1, 2020. The cost of the tanks was $150,000. The expected life of the tank is 10 years. Under new state laws, the tanks must be removed after 10 years. Cost to remove the three tanks is expected to be $20,000. Gogo’s borrowing rate is 6%.

What was Gogo Gasoline’s depreciation expense and accretion expense, respectively, in 2022? (Round your answer to the nearest whole number.)

a. $15,000; $670

b. $16,117; $670

c. $16,117; $710

d. $17,000; $670

Answer 1

Present value of asset retirement obligation = Cost to retire asset in year 10 * PVF (6%,10 years)

= 20000 * 0.5584 i.e 11168

Value of asset = Cost of asset + Present value of asset retirement obligation

= 150000+11168 i.e 161168

Depreciation per year = Value of asset/ Useful life

= 161168/ 10 i.e 16117

Accretion expense = Value of ARO in year 2021 * Discount rate

= (11168 +(11168 * 0.06))*0.06

= 710

Depreciation expense in 2022 will be 16117 and accretion expense in 2022 will be 710