A company buys an oil rig for $3,000,000 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 $600,000 (present value at 10% is $231,330). 10% is an appropriate interest rate for this company. What expense should be recorded for 2014 as a result of these events?
A) Depreciation expense of $360,000
B) Depreciation expense of $300,000 and interest expense of $23,133
C) Depreciation expense of $300,000 and interest expense of $60,000
D) Depreciation expense of $323,133 and interest expense of $23,133

Question

Quizplus · Accepted Answer

The total cost of the oil rig includes its purchase price and the present value of the cost to dismantle it, which is $3,000,000 + $231,330 = $3,231,330. This total cost is depreciated over 10 years, resulting in a depreciation expense of $323,133 per year. Additionally, the interest expense on the dismantling cost is 10% of $231,330, which equals $23,133.

A Company Buys an Oil Rig for $3,000,000 on January