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Question 2 (18 marks) During the reporting period ended 30 June 2022, Fossel Ltd erected an oil rig in Margaret River. The cost of
Question 2 (18 marks) During the reporting period ended 30 June 2022, Fossel Ltd erected an oil rig in Margaret River. The cost of the rig and associated technology amounted to $80 000 000. The oil rig commenced production on 1 July 2022. At the end of the rig's useful life, which is expected to be five years, Fossel Ltd is required by its resource consent to dismantle the oil rig, remove it, and return the site to its original condition. After consulting its own engineers and environmentalists, Fossel Ltd estimates that if such work was required to be done at the present time it would cost $10 000 000. It is anticipated that inflation will average 3 per cent over the next five years. It is also accepted that the rate on five-year government bonds reflects the relevant time value of money at 4 per cent. REQUIRED A) Calculate the adjusted cost to dismantle the oil rig, remove it, and return the site to its original condition (4 Marks) B) Calculate the present value of the restoration provision (4 Marks) C) Prepare the journal entries necessary to account for the establishment of the rig and the changing balance of the restoration provision for the years ended 30 June 2022, 30 June 2023 and 30 June 2024. Ignore depreciation. (10 Marks)
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