Question

Posh Ltd commences operations on 1/7/2012. They explore two areas and incur the following costs;

Exploration & Evaluation

Expenditure ($m)

Site Victoria 10.2Site Beckham 14.8Total 25.0

Other information.

Financial year finishes 30/6/201x

In the Financial year of 2014, oil is discovered at Site Beckham.

Of Site Victoria, $7.2 million relates to tangible assets, $3 million to

intangible assets.

Site Victoria is abandoned as no economically-viable value (recoverable

resources) exists and an impairment loss is recognized.

Of the $14.8 million (Site Beckham), $13 million relates to tangible assets,

$1.8 million to intangible.

Development costs - $10.5million are property, plant and equipment, $3.5

million are in intangibles.

Development at Site Beckham concludes at the end of 2014, production

commences start of 2015.

Development costs - are to be written off on a production basis in 2014

for Site Beckham.

It is estimated that Site Beckham will produce 8 million barrels of oil,

current price is $80 per barrel.

In 2015, 400,000 barrels are extracted; production cost is $3.9 million.

Sales for 2015 are 350,000 barrels

Required:

a) Prepare the journal entries for the costs incurred 2013, 2014 and 2015 (using the area-of-interest method of accounting).

Answer 1

2013

tangible assets a/c-dr $7.2

intangible assets a/c-dr $3

TO site victoria A/C $10.2

TANGIBLE ASSETS A/C-DR $13

INTANGIBLE ASSETS A/C-DR$1.8

TO SITE BECHAM $14.8

DEVELOPMENT COST A/C-DR $14

TO PROPERTY $10.5

TO PLANT AND EQUIPMENT A/C$3.5

SALES A/C-DR $28

TO COST OF PRODUCTION $3.9

TO PROFIT AND LOSS $24.1

NOTE:- ALL TRANSACTIONS ARE IN MILLIONS