Accounting for Extractive Industries

Question 2 Accounting for Extractive Industries Mining Ltd commences operations on 1St January 2013. During 2013, Mining Ltd explores three areas and incurs the following costs: ' Exploration and Evaluation Expenditure ( $M) Lautoka ' 40 Nadi 20 Ba 35 In 2014 Oil is discovered at the Lautoka Site. Nadi Site is abandoned. Ba Site has not yet reached a stage that permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and signicant operations in the area of interest are continuing. In relation to the exploration and evaluation expenditures incurred at Lautoka site and the Ba site, 80% of the expenditures relate to property, plant and equipment and the balance relates to intangible assets. In 2014, development costs of $30 million are incurred at Ba site (to be written off on a production basis). $21 million of this expenditure relates to property, plant and equipment, and the balance relates to intangible assets. Lautoka site is estimated to have 12,000,000 barrels. The current sale price is $29 per barrel. Three million barrels are extracted at a production cost of $4 million and 1.80 million barrels are sold. Reguired ACC706 Trimester 2 Page 4 a) Prepare the journal entries using the full cost method. (16 Marks). b) Would the full cost method or the area of interest method of accounting for the extractive industries provide a greater volatility of earnings