tra Processes is involved with innovative approaches to finding energy reserves. Xtra recently built a facility to extract natural gas at a cost of $15 million. However, Xtra is also legally responsible to remove the facility at the end of its useful life of twenty years. This cost is estimated to be $21 million (the present value of which is $8 million). What is the journal entry required to record the asset retirement obligation?
A) No journal entry required.
B) Debit Natural Gas Facility for $21,000,000 and credit Asset Retirement Obligation for $21,000,000
C) Debit Natural Gas Facility for $6,000,000 and credit Asset Retirement Obligation for $6,000,000.
D) Debit Natural Gas Facility for $8,000,000 and credit Asset Retirement Obligation for $8,000,000.

Question

Quizplus · Accepted Answer

The journal entry required to record the asset retirement obligation is to debit the Natural Gas Facility for the present value of the obligation, which is $8,000,000, and credit the Asset Retirement Obligation for the same amount. This entry recognizes the legal responsibility that Xtra has to remove the facility at the end of its useful life and records the estimated cost of fulfilling that obligation. Option A is incorrect because a journal entry is required. Option B is incorrect because it records a higher amount than the present value of the obligation. Option C is incorrect because it records the same amount as the present value, but this amount is not sufficient to fulfill the obligation.

Tra Processes Is Involved with Innovative Approaches to Finding Energy