? Financial year ends at 30 June ?In the year of 2014, oil is discovered at Site

Question

? Financial year ends at 30 June

?In the year of 2014, oil is discovered at Site Y.

? Of Site X, $8 million relates to tangible assets, $4 million intangible assets.

? Site X is abandoned as no prove of existence of economically recoverable resources, and an impairment loss is recognised

? Of the $16 million of Site Y, $10 million relates to tangible assets, $6 million intangible.

? Development costs of $14m are incurred at Site Y - $9 million are property, plant and equipment, $5 million are in intangibles.

? Development at Site Y concludes at the end of 2014 financial year, production commences at the start of July 2015.

? Development costs - are to be written off on a production basis in 2014 for Site Y.

? It is estimated that Site Y will produce 8 million barrels of oil. The current sale price is $50 per barrel.

? In 2015, 1m barrels are extracted; production cost is $3.8 million. Sales for 2015 are 800,000 barrels

Required: a) Prepare the journal entries for the costs incurred 2013, 2014 and 2015 (using the areaof-interest method of accounting). (15 marks)

b) Explain the difference between Area of Interest method and Full-cost method? (2 marks)

A3011 Past Exam 2.T. xV ED/Desktop/HA301 1 Past%20barn,2-13-201 7.pdf (17 marks) Question 5 Assume that Rio Ltd commences operations on 1/7/2012. It explores two areas and incurs the following costs: Exploration & Evaluation Expenditure (Sm) (8+ 4) ?10.61 12 Site X Site Y Total 28 Other information Financial year ends at 30 June In the year of 2014, oil is discovered at Site Y Of Site X, $8 million relates to tangible assets, $4 million intangible assets. Site X is abandoned as no prove of existence of ecofomically recoverable resources, and scocñiomially recoverable resources, and an impairment loss is recognised Of the $16 million of Site Y. $10 million relates to tangible assets, $6 million intangible. Development costs of $14m are incurred at Site Y-$9 million are property, plant and equipment, $5 million are in intangibles. Development at Site Y concludes at the end of 2014 financial year, production commences at the start of July 2015 . . .Development costs are to be written off on a production basis in 2014 for Site Y . It is estimated that Site Y will produce 8 million barrels of oil. The current sale price is $50 per barrel. In 2015, 1m barrels are extracted; production cost is $3.8 million. Sales for 2015 are 800,000 barrels NA3011 Advanced Financial Accounting Trimester 3 2017 FalExam

Explanation / Answer

Whenver any expenditure are incurred as regards to minaral exploration, are treated as capital expenditure,

Journal entrries for the cost incurred :

2012-13 :

Oil exploration & Evaluation a/c Dr. 4000000

Asset a/c (site-X) Dr. 8000000

To Bank A/c Cr. 12000000

( Expenses for site X)

Oil exploration & Evaluation a/c Dr. 6000000

Asset a/c (site Y) Dr. 10000000

To Bank A/c Cr. 16000000

( Expenses for site Y)

2013-14:

Profit and Loss a/c Dr. 4000000

To Oil & Exploration & Evaluation a/c Cr. 4000000

( Site X abonded. so expenditure transferred to P&L a/c)   

Development cost-Oil ) Dr. 5000000

Asset a/c (Pant & Mach, property) Dr. 9000000

To Bank A/c Cr. 14000000

( Expenses for site Y in 2014)

2014-15

Oil site-Y Dr. 6000000

To Oil & Evaluation a/c Cr. 6000000

( Amt trfd to site-Y as commenced )

Profit & Loss A/c Dr. 500000

Development cost Cr. 500000

( Development 1/10th written off which were incurred in 2014)

Note :

1. Asset lying at site X (tangible asset) . Management will decide that what they will do.

2. Development cost will be ammortized as per estimated reserve of oil   

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