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 $815,000 and the present value of these asset retirement costs was $307,000 based on the 5% after-tax discount rate. At the end of the 20 year life, the company dismantles the oil rig and restores the land at a cost of $890,000. Following U.S. GAAP, the journal entry to record the completion of the restoration process would include:
A) credit Loss on Settlement of Asset Retirement Obligation for $583,000
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 $583,000

Question

Quizplus · Accepted Answer

The loss on settlement is calculated as the difference between the actual cost ($890,000) and the liability recorded ($815,000). The loss is $75,000, which should be debited.

Lifeline Biofuels Built an Oil Rig at a Cost of $4.5