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QUESTION 7 Entity A is the top producer of oil. On 1 October 2022, Entity A commenced drilling for oil from an undersea oilfield.
QUESTION 7 Entity A is the top producer of oil. On 1 October 2022, Entity A commenced drilling for oil from an undersea oilfield. The extraction of oil causes damage to the seabed which has a restoration cost of $25,000 per million barrels of oil extracted. Entity A extracted 150,000,000 barrels of oil in the year ended 30 September 2023. Entity A is also required to dismantle the drilling equipment at the end of its five-year licence. This has an estimated cost of $30,000,000 on 30 September 2027. Entity A's cost of capital is 10.00%. REQUIRED: How much is the provision liability which Entity A would report in its statement of financial position on 30 September 2023 in respect of its oil operations? ANSWER: The provision liability is $ as at the end of the reporting period. QUESTION 8 Entity A is being sued by a customer for $5,000,000 for breach of contract over a cancelled order. Entity A has obtained a legal opinion that there is a 20% chance that Entity A will lose the case. Therefore, Entity A has prepared to provide $1,000,000 in respect of the claim at the end of the reporting period. The unrecoverable legal costs of defending the action are estimated at $100,000. These have not been provided for as the case will not go to court until next year. REQUIRED: What is the amount of the provision that should be made by Entity A in accordance with HKAS 37 Provisions, Contingent Liabilities and Contingent Assets? ANSWER: The provision liability is S as at the end of the reporting period.
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