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#Due to due from journal entries license#

The company needs to depreciate the oil drilling over the useful life of 10 years.ĭepreciation Expense = $ 55,583,948 / 10 years = $ 5,558,394 per year The total cost of oil drilling would be $ 55,583,948 ($ 50,000,000 + $ 5,583,948), it will be classified as fixed assets on balance sheet. This transaction will include the fixed assets (Oil Drill) on the balance sheet, it will be depreciated over the useful life. The journal entry is debiting Fixed Assets (Oil Drill) $ 5,583,948 and credit ARO.

Management has estimated the AOR is $ 10 million which will happen in 10 years, so we need to discount today’s value with interest-free rate of 6%. The accountant needs to record the assets retirement obligation which is the liability into the balance sheet.

Please prepare a journal entry related to assets retirement obligation.ĪBC has the obligation to remove any negative impact which incurs due to their business operation. Management has estimated the cost to remove the impact would cost 10 million. However, the government requires the company to remove any negative footprint which incurs due to the leak of oil and so on.

The well will be able to generate income for 10 years.

The entity has no option to avoid the future transfer or use of assets.Īssets retirement obligation journal entry ExampleĪBC is an oil drilling company, they expect to drill the well which costs $ 50 million.

The company is able to measure the ARO’s fair value.

The criteria to record the assets retirement obligationĬompany requires to record lability when there are enough criteria as follow: The journal entry is debiting ARO and credit cash paid to complete the assets’ decommission. It is also the time to settle the liability in the balance sheet. It also increases the value of ARO to the present value.Īt the end of fixed useful life, the company has to complete its obligation. At the end of assets useful life, it will equal the company estimation (future value). The ARO will keep increasing every year base on the interest rate. The journal entry is debiting accretion expense and assets retirement obligation. We need to use the same discounted rate which applies during initial recognition. The debit side will impact the accretion expense. The amount of This fixed asset will be included with associate assets to make the depreciation depend on the estimated useful life.Īt the end of the accounting period, the company needs to record additional assets retirement obligations which need to increase to the future value on the retirement date. The obligation will present as a liability at the present value. This cost will be part of fixed assets on balance sheet. The journal entry is debiting fixed assets and credit assets retirement obligation. It will record as part of the associated fixed assets. It is the present value of the estimated future cost. The liability needs to record at fair value, most companies use the present value. It is the estimated cost that company makes based on past experience and technical analysis. It is the cost to remove or reverse the modification to comply with government requirements or lease contracts. Assets retirement obligation journal entryĪssets retirement obligation is the company liability that needs to record on balance sheet. It is the obligation that the lessee needs to remove any modification during the lease term. The company modified the assets and promise to reverse back at the end of the operating lease.

#Due to due from journal entries license#

This cost happens when company makes a huge investment that impacts the whole community, so the government requires to reverse the impact otherwise the license will not be issued.Īssets retirement obligation also happens when the company leases the fixed assets from the property owner. At the end of drill operation, the company must spend cash to remove all the impact which cause by the oil drilling.Īssets retirement obligation is also known as the decommissioning cost which presents as the company’s liability to be settled in the future. For example, a company drills the oil from the ground, and some of the oil will leak from the well and impact the surrounding area. These modifications will impact the public around them, so the government requires the company to reverse it back at the end of fixed assets useful life. Some fixed assets require the company to make installations on the landscape and the area. It is the company’s obligation that needs to remove any impact from the community caused by the investment. Asset Retirement Obligation Journal EntryĪssets retirement obligation is the process of reversal of fixed assets modification which impacts the surrounding community.