Excavator Ltd had two areas of interest, Site A and Site B. The following costs were...

 

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Excavator Ltd had two areas of interest, Site A and Site B. The following costs were incurred to each area of interest during year 2019: Year Site A Site B ($ million) ($ million) 2019 Cash paid to acquire seismic study from government before the exploration Labour.costs of engineers to analyse the seismic data obtained Cash paid to acquire exploration rights for the area from government Legal costs associated with obtaining the exploration licence Hire of drilling equipment for exploratory drilling Contractors' fees for exploratory drilling 5.5 10 2.5 367 620 2 3 25 15 12 NOTE: Ignore GST. In relation to the above expenditures that can be classified as exploration and evaluation costs, 70 per cent relates to intangible assets and the balance of the expenditure relates to property, plant and equipment. In 2020, oil of an economically recoverable nature is discovered at Site A, but Site B is abandoned. Production begins in 2021. Site A is estimated to have 2,000 barrels. The current sale price is $4 million per barrel. During 2021, 100 barrels are extracted at a total production cost of $40 million and 60 barrels are sold. REQUIRED (a) Determine the amount of the exploration and evaluation (E&E) asset to be capitalised by Excavator Ltd in 2019 in relation to Site A and Site B, respectively. (2 marks) (b) Provide the journal entries for years 2019 to 2021 using the area-of-interest method. Assume pre-production costs are amortised or depreciated using the production-output method. Exclude journal narrations. (8 marks) Excavator Ltd had two areas of interest, Site A and Site B. The following costs were incurred to each area of interest during year 2019: Year Site A Site B ($ million) ($ million) 2019 Cash paid to acquire seismic study from government before the exploration Labour.costs of engineers to analyse the seismic data obtained Cash paid to acquire exploration rights for the area from government Legal costs associated with obtaining the exploration licence Hire of drilling equipment for exploratory drilling Contractors' fees for exploratory drilling 5.5 10 2.5 367 620 2 3 25 15 12 NOTE: Ignore GST. In relation to the above expenditures that can be classified as exploration and evaluation costs, 70 per cent relates to intangible assets and the balance of the expenditure relates to property, plant and equipment. In 2020, oil of an economically recoverable nature is discovered at Site A, but Site B is abandoned. Production begins in 2021. Site A is estimated to have 2,000 barrels. The current sale price is $4 million per barrel. During 2021, 100 barrels are extracted at a total production cost of $40 million and 60 barrels are sold. REQUIRED (a) Determine the amount of the exploration and evaluation (E&E) asset to be capitalised by Excavator Ltd in 2019 in relation to Site A and Site B, respectively. (2 marks) (b) Provide the journal entries for years 2019 to 2021 using the area-of-interest method. Assume pre-production costs are amortised or depreciated using the production-output method. Exclude journal narrations. (8 marks)

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