[nicolevern]

Hi!

I have a question about asset retirement obligations (ARO). Here's the question:

Oil Products Limited purchases an oil tanker depot on January 1, 2008 at a cost
of $800,000 and expects to operate the depot for 10 years. After the ten years,
the company is legally required to dismantle the depot and remove the
underground storage tanks. It is estimated that it will cost $75,000 to do this
at the end of the depot's useful life.

a)Prepare the journal entries to record the acquisition of the depot and the
asset retirement obligation for the depot on Jan 1, 2008. Based on an effective
interest rate of 5%, the present value of the ARO (ie it's fair value) on the
date of acquisition is $46,043.

b) Prepare any journal entries required for the depot and the ARO at Dec 31
2008. Oil Products uses straight-line amortization. The estimated residual
value of the depot is zero.

c) On Dec 31, 2009, the required rate used to discount the liability changed to
7%. Using this rate, the present value of the asset retirement obligation
payable in 8 years is $43,650. Prepare the year end journal entries at Dec 31,
2009 and Dec 31, 2010.

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My question is in regards to part (c). How does the change in rate affect the
journal entries? What is the solution? I have attached my work on this problem,
have I done it correctly so far?

For 2010 interest expense, would it just be (43,650+3055.50)x 7% = 3,269.39

Note, the company follows IFRS, thus my use of interest rather than accretion expense. See my attached solution so far.

Thanks!