Answered Essay: Offshore

On January 1 of the current year,,Mooney Oil invested $8,000,000 to construct an offshore oil platform, and paid cash. As part of its offshore drilling agreement, Mooney is responsible for dismantling and removing the platform at the end of its 15-year useful life. Mooney depreciates the platform by using the straight-line method with no residual value expected at the end of its useful life.

The asset did not have a reasonably determinable quoted market price and market comparables are not available. As a result, Mooney decided to use aprobability-based estimate of the cost of dismantling and removing the platform to estimate the fair value of the retirement obligation. The probability-based estimate employs the expected cash flows needed to comply with the offshore drilling agreement based on costs of dismantling and removal in today’s market. The estimated values are as follows:

Estimated Future Cash Flows Probability of Occurrence

$580,000 65%

$780,000 33%

$1,020,000 2%

The company’s estimated cost of capital is 7%

Requirement a. Prepare the journal entries required to record the investment in the offshore oil platform.

Requirement b. Prepare the journal entry to record the first year’s depreciation and accretion accrual.

Requirement c. Prepare the journal entries required to record the disposal o the asset and the settlement of the asset retirement obligation at the end of the 8th year. After acquisition. Mooney sold the asset for $980000 and the costs of dismanting & removing the offshore oil platform totaled $ 1,200,000 (Give the steps by steps for requirement c).

Expert Answer


a Offshore Oil Platform Debit 8237330 8000000+237330
Asset Retirement Obligation Credit 237330
Cash Credit 8000000
Estimated future cashflows Probability Expected Value
580000 65% 377000
780000 33% 257400
1020000 2% 20400
Expected Retirement Cost 654800
Present value of expected Retirement cost 237330 654800/(1+0.07)^15
b Depreciation under straight line method= (Cost of asset-salvage value)/Life of assets 549155 8237330/15
Depreciation Expense Debit 549155
Accumulated Depreciation-Plant Assets Credit 549155
Interest Expense 16613 (237330*7%)
Asset retirement Obligation 16613
c Accumulated Depreciation-Plant assets Debit 4393243 (549155*8)
Asset Retirement Obligation Debit 407777 237330*(1+0.07)^8
Loss on Sale of plant 2864087 balancing figure
Loss on Settlement of Retirement Obligation 792223 (1200000-407777)
Offshore Oil Platform Credit 8237330
Cash Credit 220000 (1200000-980000)
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