Question

Royal Dutch Shell PLC (RDS) is a large, multinational oil company. Its wholly owned subsidiary, the Shell Oil Company, is preparing to purchase a semi-submersible oil rig for $15 million. Additionally, it is going to cost $1.5 million to move the oil rig to the Mars oil-field and secure it in location. While preparing the oil field for production, an additional $2.5 million dollars will be spent on research, geological surveys, and training. If this acquisition is going to be depreciated over five years using straight-line depreciation, what are the yearly depreciation expenses in this case?

a) 3.3 million

b) 2.7 million

c) 4.5 million

d) 3.0 million

e) 3.8 million

Answer 1

cost of purchase	$ 15,000,000.00
transport cost	$    1,500,000.00
total cost of the oil rig	$ 16,500,000.00

The moving cost will be included in the value of the asset as the cost is needed to be incurred and cannot be avoided and it adds to the total cost incurred to acquire that asset.

The cost of R&D and training will not be included in the oil rig value, but will be treated as a preliminary cost and will be deducted from the operating expense separately

Now, depreciation = Value of the asset / life of the asset

Value = $16.5 mil

Life = 5 yrs

Depreciation = 16.5/5

= 3.3 million

so answer is A