A company buys an oil rig for $2,000,000 on January 1, 2014. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $400,000 (present value at 10% is $154,220). 10% is an appropriate interest rate for this company. What expense should be recorded for 2014 as a result of these events?

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Quizplus · Accepted Answer

The total cost of the oil rig includes its purchase price plus the present value of the cost to dismantle it, which is $2,000,000 + $154,220 = $2,154,220. Over a 10-year life, the annual straight-line depreciation is $2,154,220 / 10 = $215,422. Additionally, the interest expense on the dismantling cost is the present value of the dismantling cost ($154,220) multiplied by the interest rate (10%), which equals $15,422.

A Company Buys an Oil Rig for $2,000,000 on January