Question
We will assume that Extracto Ltd commences operations on 1 January 2013. During 2013, Extracto Ltd explores two areas and incurs the following costs. Area
We will assume that Extracto Ltd commences operations on 1 January 2013. During 2013, Extracto Ltd explores two areas and incurs the following costs.
Area | Exploration and evaluation expenditure ($m) |
Good | 23 |
Bad | 16 |
Indifferent | 25 |
In 2014, oil is discovered at Good Site. Bad Site is abandoned. Indifferent Site has not yet reached a stage that permits a reasonable assessment of the exstence or the otherwise of economically recoverable reserves, and active and significant operations in the area of interest are continuing. In relation to the exploration and evaluation expenditures incurred at Good Site and Indifferent Site, 80 per cent of the expenditures relate to property, plant and equipment, and the balance relates to intangible assets.
In 2014 development costs of $27 million are inccured at Good Site (to be written off on a production basis). $20 million of this expenditure relates to property, plant and equipment, and the balance relates to intangible assets. Good Site is estimated to have 15,000,000 barrels. The current sale price is $30 per barrel. Three million barrels are extracted at a production cost of $4 million and 1.9 million are sold.
Required
Provide the necessary journal entries for the three years 2013, 2014 using:
(a) The area-of-interest method
(b) The full-cost method
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