Lifeline Biofuels built an oil rig at a cost of $4.5 million. The company estimates the oil rig will have a useful life of 20 years (with no salvage value), after which Federal regulations require that the oil rig must be dismantled and the land area restored at an expected fair value of $1.3 million. The present value of these asset retirement costs is $400,000 based on the 6% after-tax discount rate. The company follows U.S. GAAP.
a. Prepare the journal entry prepared at the completion of construction to value the oil rig.
b. Prepare the journal entry to record the annual increase in the carrying value of the liability.
c. At the end of 20 years, the company dismantles the oil rig and restores the land area at a cost of $1.5 million. Prepare the journal entry to record payment of the settlement costs in cash.

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The Answer of Lifeline Biofuels built an oil rig at a cost of $4.5 million. The company estimates the oil rig will have a useful life of 20 years (with no salvage value), after which Federal regulations require that the oil rig must be dismantled and the land area restored at an expected fair value of $1.3 million. The present value of these asset retirement costs is $400,000 based on the 6% after-tax discount rate. The company follows U.S. GAAP.
a. Prepare the journal entry prepared at the completion of construction to value the oil rig.
b. Prepare the journal entry to record the annual increase in the carrying value of the liability.
c. At the end of 20 years, the company dismantles the oil rig and restores the land area at a cost of $1.5 million. Prepare the journal entry to record payment of the settlement costs in cash.

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