Question

"Sheridan Processes is involved with innovative approaches to finding energy reserves. Sheridan recently built a facility to extract natural gas at a cost of $12.8 million. However, Sheridan is also legally responsible to remove the facility at the end of its useful life of twenty years. This cost is estimated to be $16 million (the present value of which is $6.3 million). What is the journal entry required to record the asset retirement obligation

Answer 1

Answer:

Natural gas is debited by $6.3 million and asset retirement obligation is credited by $6.3 million.

Explanation:

According to the scenario, computation of the given data are as follow:-

Estimated cost = $16 million

Present value = $6.3 million

So, we will make journal entry for asset retirement obligation by taking present value of assets.

Journal entry to record the asset retirement obligation are as follows :-

Natural gas facility A/c  Dr.   $6,300,000

To Asset retirement obligation A/c  $6,300,000

( Being asset retirement obligation is recorded)