Question

A company buys an oil rig for $3,000,000 on January 1, 2018. 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 2018 as a result of these events?

Answer 1

Answer:

$346,266.00

Explanation:

The expense that should be recorded for 2018 as a result of the events is the depreciation charge plus the finance charge on the present of value of dismantling cost

depreciation=(cost of oil rig+present value of dismantling cost)/10 years

cost of oil rig is $3,000,000

present value of dismantling cost=$231,330

depreciation charge=($3,000,000+$231,330)/10=$323,133.00  

finance charge=$231,330*10%=$23133

total expense=$23,133.00 +$323,133.00 =$346,266.00