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Zip Oil Mining Company has the following information. The company is required to restore the land...

Zip Oil Mining Company has the following information.

The company is required to restore the land to an acceptable condition for a housing development after completion.

Amounts paid for the right to drill $8,000,000
Costs of drilling $654,120
Intangible development costs incurred in exploring $932,000
Assume all items are paid with cash.
Projected cash flow possibilities are as follows: Cash Outflow Probability
Estimate #1 $343,000 59%
Estimate #2 $190,000 41%
The company's adjusted risk free rate 2%
The project will last 2 years

a. CALCULATE THE PRESENT VALUE OF THE EXPECTED CASH OUTFLOWS FOR RESTORATION COSTS.

b. Calculate the total cost of the Oil Field asset (includes restoration costs calculated in a).

c. CONSIDER THE JOURNAL ENTRIES REQUIRED TO CAPITALIZE THE OIL FIELD AND REECORD THE ASSET RETIREMENT OBLIGATION AT THE BEGINNING OF THE PROJECT. DETERMINE THE IMPACT THAT THIS JOURNAL ENTRIES HAS ON THE ASSET SECTION (ONLY) OF THE BALANCE SHEET.

d. Complete the entire amortization table for the two year period.  

CALCULATE ACCRETION EXPENSE IN YEAR ONE.

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Amounts paid for the right to drill Costs of drilling Intangible development costs incurred in exploring Assume all items are paid with cash $8,000,000 $654,120 932,000 Projected cash flow possibilities are as follows: Estimate #1 Estimate #2 Cash Outflow Probability $343,000 $190,000 59% 41% The companys adjusted risk free rate 2% The project will last 2 years a. CALCULATE THE PRESENT VALUE OF THE EXPECTED CASH OUTFLOWS FOR RESTORATION COSTS. Restoration Costs at fair value Estimate #1 Estimate #2 PV factor @2% Restoration Costs at fair value 202,370 77,900 280,270 0.96117 Considered up to 5 decimal places. 269,387 b. Calculate the total cost of the Oil Field asset (includes restoration costs calculated in a Depletion Base Acquisition Cost Cost of Drilling Exploration and Development Costs Restoration Costs at fair value Total 8,000,000 654,120 932,000 269,387 9,855,507

Date General Journal Debit Credit C. CONSIDER THE JOURNAL ENTRIES REQUIRED TO CAPITALIZE THE OIL FIELD AND REECORD THE ASSET RETIREMENT OBLIGATION AT THE BEGINNING OF THE PROJECT Oil Reserves Cash Asset Retirement Obligation To record acquisition of oil reserves and asset retirement Obligation 9,855,507 9,586,120 269,387 DETERMINE THE IMPACT THAT THIS JOURNAL ENTRIES HAS ON THE ASSET SECTION (ONLY) OF THE BALANCE SHEET The retirement obligation will be added to the cost of oil reserves (Asset) to be capitalised d. Complete the entire amortization table for the two vear period Depletion expense Accumulated Depletion To record Depreciation-vear 1 31-Dec 4,927,754 4,927,754 Depletion expense Accumulated Depletion To record Depreciation-vear 2 Year 2 4,927,754 4,927,754 CALCULATE ACCRETION EXPENSE IN YEAR ONE. 31-Dec Interest Expense Asset Retirement Obligation To record unwinding of ARO liability-Year 1 5,387 5,387 269,387 x 2% Workings Year 0 PV factor @2% Present Value Interest 280,270 280,270 280,270 1.000 0.980 0.961 280,270 274,774 269,387 5,387 5,496 10,883 2

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