Question

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. Assume that at the end of the project Zip Oil Mining Company must ultimately pay the following amount to properly restore the land: Actual costs incurred to restore the asset = $500,000 CALCULATE THE GAIN OR LOSS ON THE RESTORATION OF THE ASSET.

b. Assume that at the end of the project Zip Oil Mining Company must ultimately pay the following amount to properly restore the land: Actual costs incurred to restore the asset = $500,000 INDICATE THE IMPACT ON THE LIABILITY SIDE OF THE BALANCE SHEET.

c. Assume that at the end of the project Zip Oil Mining Company must ultimately pay the following amount to properly restore the land: Actual costs incurred to restore the asset = $500,000 INDICATE THE IMPACT ON STOCKHOLDER'S EQUITY.

d. Assume that at the end of the project Zip Oil Mining Company must ultimately pay the following amount to properly restore the land: Actual costs incurred to restore the asset = $200,000 CALCULATE THE GAIN OR LOSS ON THE RESTORATION OF THE ASSET.

e. Assume that at the end of the project Zip Oil Mining Company must ultimately pay the following amount to properly restore the land: Actual costs incurred to restore the asset = $200,000 CALCULATE THE GAIN OR LOSS ON THE RESTORATION OF THE ASSET. THEN, CONSIDER THE JOURNAL ENTRY REQUIRED TO SATISFY THE LIABILITY. INDICATE THE IMPACT THAT THE JOURNAL ENTRY HAS ON THE STOCKHOLDER'S EQUITY SECTION (ONLY) OF THE BALANCE SHEET.

Answer 1

A. Assume that at the end of the project Zip Oil Mining Company must ultimately pay the following amount to properly restore the land: Actual costs incurred to restore the asset = $500,000 CALCULATE THE GAIN OR LOSS ON THE RESTORATION OF THE ASSET.

STATEMENT SHOWING NET GAIN OR LOSS ON THE RESTORATION OF THE ASSET WHEN THE ACTUAL RESTORATION COST IS $5,00,000 Cash Outflow ProbabilitylCash Calculation Workings Projected cash flow possibilities are as follows: Estimate #1 Estimate #2 Total The company's adjusted risk free rate Cumulative present value of $1 per annum Payable at the end 2n year Present value of outflows Net gain or loss on the restoration of the asset Outflow $343,000 $190,000 $533,000 $202,370 343000x59% 59% 41% $77,900 190000x41 $280,270 2% 1.942 1.942x$280270 $544284.34 $544284.34-$500000 $44284.34 Initial Out Flows Particulars Calculation Workings Amounts paid for the right to drill Costs of drillin Intangible development costs incurred in exploring Total Out Flows Amount 8,000,000 $654,120 $932,000 $9,586,120 $800000+$654120+$932000

Note: The initial cost of right to drill,cost of drilling and intangible development cost incurred in exporting is irrelevant for calculation of net gain or loss.

B. Assume that at the end of the project Zip Oil Mining Company must ultimately pay the following amount to properly restore the land: Actual costs incurred to restore the asset = $500,000 INDICATE THE IMPACT ON THE

LIABILITY SIDE OF THE BALANCE SHEET.

Net loss $44,284.34 should be debit to P&L account as loss and liability of cost of drilling should be increased to the extent of this amount of $44,284.34 in the liability side of Balance Sheet.

C. Assume that at the end of the project Zip Oil Mining Company must ultimately pay the following amount to properly restore the land: Actual costs incurred to restore the asset = $500,000 INDICATE THE IMPACT ON STOCKHOLDER'S EQUITY.

It will not effect stockholders equity.

D. Assume that at the end of the project Zip Oil Mining Company must ultimately pay the following amount to properly restore the land: Actual costs incurred to restore the asset = $200,000 CALCULATE THE GAIN OR LOSS ON THE RESTORATION OF THE ASSET.

STATEMENT SHOWING NET GAIN OR LOSS ON THE RESTORATION OF THE ASSET WHEN THE ACTUAL RESTORATION COST IS $2,00,000 Cash Outflow Probable Cash Calculation Outflow Projected cash flow possibilities are as follows: Estimate #1 Estimate #2 Total The company's adiusted risk free rate Cumulative present value of $1 per annum Payable at the end 2n year Present value of outflows Net gain or loss on the restoration of the asset Probability 59% 41% Workings $343,000 $190,000 $533,000 $202,370 343000x59% $77,900 190000x41 $280,270 2% 1.942 (1.942x$280270) $544284.34 ($544284.34-$200000)-$244284.34