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A company buys an oil rig for $3700000 on January 1, 2021
A company buys an oil rig for $3700000 on January 1, 2021. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $594000 (present value at 8% is $275140).8% is an appropriate interest rate for this company. What expense should be recorded for 2021 as a result of these events? O Depreciation expense of $397514 and interest expense of $22011 Depreciation expense of $296000 and interest expense of $47520 O Depreciation expense of $343520 O Depreciation expense of $296000 and interest expense of $22011
Expert Solution
Answer A i.e Depreciation expenses $ 397514 and Interest Expenses $ 22011
Value of Oil Rig = $ 37,00,000
Present Value of Dismantling Cost = $ 2,75,140
Total value of the Asset = $ 39,75,140
Life of the Asset = 10 yrs
Depreciation = $ 39,75,140 /10 = $ 397514
Interest rate = 8%
INTEREST EXPENSES = $2,75,140*8% = $ 22,011
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