Pete s Petroleum Inc an SEC registrant with a calendar

year end #2512

Pete’s Petroleum, Inc., an SEC registrant with a calendar year-end, is in the business of
constructing and operating offshore oil platforms. Pete’s Petroleum is required legally to
dismantle and remove the platforms at the end of their useful lives, which is estimated to be 10
years. On January 1, 2016, Pete constructed and began operating an offshore oil platform off
the coast of Brazil. The total capitalized cost to construct the platform was $ 3,700,000. In
addition, while the future cost of dismantling the oil platform is difficult to estimate, Pete believes
there is a 40% chance that the future cost will be $ 1,425,000, a 40% chance it will be $
1,650,000, and a 20% chance that it will cost $ 2,125,000. The appropriate discount rate is
12%, and Pete uses the straight- line method of depreciation.Required:1. Prepare the journal
entries that Pete should record in 2016 related to the oil platform.2. Prepare an amortization
schedule for the asset retirement obligation.3. Next Level Prepare a table showing the effect of
accounting for the asset retirement obligation on assets, liabilities, shareholders’ equity, and
net income relative to accounting for the associated costs at the end of the asset’s service life
when the expenditure is made.View Solution:
Pete s Petroleum Inc an SEC registrant with a calendar year end

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