The Idle Drilling Rig Case

"The Big Boom?"

The Wildcatter Exploration Company, a small independent, owns an oil field drilling rig. Wildcatter purchased the rig new for $2.5 million during the height of the energy boom when prices for crude oil ranged between $25 and $30 per barrel. The rig was taken out of service following the free fall in the world oil prices in the middle of the last decade, and has been out of service ever since. Its carrying amount (i.e. net book value) is $2 million.

Wildcatter's management believes that the undepreciated invested cost of the rig is recoverable because the downturn in oil prices is only temporary and prices will return to boom levels once again. However, the current price of oil has languished around $l9 , and there is virtually no market for used drilling rigs, although a scrap metal dealer recently offered Wildcatter $100,000 for the rig.

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• Should Wildcatter's drilling rig be regarded as an "impaired asset" and its carrying amount be written down? If so, to what amount should it be written down?

Answer rating: 100% (QA)

Wildcatters drilling rig should be regarded as an impaired asset if its carrying amount exceeds its ... View the full answer