On 1 July 2021 the construction of a fixed oil platform is completed and ready for...

 

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On 1 July 2021 the construction of a fixed oil platform is completed and ready for use at a total cost of $500 million. The useful life of the rig is linked to the 25-year exploration rights granted to the company. Due to the specific nature of the platform, it is deemed to have no realisable value (other than minimal scrap value) at any stage throughout its life. The company uses straight line depreciation. Due to this unique asset not having a market to determine fair value, all impairment tests are based on value-in-use estimations On 30 June 2023 a rapid and significant decline in world oil prices has provided an indication that the asset may be impaired. On this date, the rig's value-in-use is estimated to be $414 million. On 30 June 2024 a major contract was cancelled after one of the company's customers was declared bankrupt. This led directors to believe the value-in-use of the rig was now $374 million. Required: Prepare the necessary journal entries to record adjustments for impairment on 30 June 2023 and 30 June 2024. Hint: You need to calculate carrying amount of the asset on these dates before you can compare to value-in-use. Show all calculations. On 1 July 2021 the construction of a fixed oil platform is completed and ready for use at a total cost of $500 million. The useful life of the rig is linked to the 25-year exploration rights granted to the company. Due to the specific nature of the platform, it is deemed to have no realisable value (other than minimal scrap value) at any stage throughout its life. The company uses straight line depreciation. Due to this unique asset not having a market to determine fair value, all impairment tests are based on value-in-use estimations On 30 June 2023 a rapid and significant decline in world oil prices has provided an indication that the asset may be impaired. On this date, the rig's value-in-use is estimated to be $414 million. On 30 June 2024 a major contract was cancelled after one of the company's customers was declared bankrupt. This led directors to believe the value-in-use of the rig was now $374 million. Required: Prepare the necessary journal entries to record adjustments for impairment on 30 June 2023 and 30 June 2024. Hint: You need to calculate carrying amount of the asset on these dates before you can compare to value-in-use. Show all calculations.

Answer rating: 100% (QA)

To calculate the carrying amount of the asset on June 30 2023 and June 30 2024 we need to determine the accumulated depreciation up to those dates Giv... View the full answer