In January 2019 XYZ Oil Ltd acquired a permit to explore for and produce oil in an area located in Bass Strait. The financial year of XYZ Oil Ltd ends on 30 June each year. XYZ Oil incurred, and capitalised, the costs shown below:

In June 2022, the company’s experts estimated that the deposit would produce 22.5 million barrels of oil to be profitably extracted over the production period of 10 years allowed by the company’s permit. On the basis of this information, XYZ Oil announced that production in the area would commence on 1 July 2023.

On 30 June 2023, engineers estimate that development and construction activities have resulted in $800,000 worth of restoration costs that XYZ Oil Ltd is obligated to spend at the end of the mine’s life under commonwealth legislation. The company nominates a discount rate of 6% as relevant for its oil operations.

The useful life of the oil rig and helicopter landing site was 15 years starting on the date production commenced. The oil rig and helicopter landing site cannot be economically removed from the site. The sea-going vessels had a useful life of 18 years commencing on 1 July 2023 and will be used for access to a production site off Western Australia - expected to be operational by the time production finishes in Bass Strait. The estimated useful life of the production equipment was 5 years from 1 July 2023. All disposal values at the end of relevant useful lives were zero.

Activities for the year ended 30 June 2024 were as follows:

Production and sales (in barrels):

Barrels of oil produced 2,500,000

Barrels of oil sold 2,200,000

Revenues and costs:

Selling price of oil $55 per barrel

Production costs (excluding depreciation and amortisation) $81,325,000

Head office administration expenses allocated $4,500,000

Selling expenses $3,000,000 

REQUIRED:

Assume all costs incurred during the exploration and evaluation phases were capitalised, for the year ended 30 June 2024:

a) What are the amortisation rate and amortisation expense?

b) What is the depreciation expense related to the following assets:

• the oil rig and helicopter landing site
• sea-going vessels
• production equipment

For each asset, briefly justify the choice of depreciation method.

c) What is the finance cost related to the restoration costs?

Transcribed Image Text:

Details Year 2019-2021 $ Amount 10,000,000 Exploration and production right acquired Geological survey undertaken by Olive Exploration 2.500,000 2021-2022 Exploration costs 4,500,000 Evaluation costs 1,500,000 2022-2023 Construction of oil rig in Bass Strait 18,000,000 Construction of helicopter landing site on oil rig 2,500,000 2022-2023 Sea-going vessels for transportation to/from oil rig 8,000,000 2022-2023 Production equipment acquired 5,200,000 Details Year 2019-2021 $ Amount 10,000,000 Exploration and production right acquired Geological survey undertaken by Olive Exploration 2.500,000 2021-2022 Exploration costs 4,500,000 Evaluation costs 1,500,000 2022-2023 Construction of oil rig in Bass Strait 18,000,000 Construction of helicopter landing site on oil rig 2,500,000 2022-2023 Sea-going vessels for transportation to/from oil rig 8,000,000 2022-2023 Production equipment acquired 5,200,000

Answer rating: 100% (QA)

a The amortisation rate is 10 and the amortisation expense is 1000000 how The amortisation rate is calculated by dividing the exploration and evaluati... View the full answer