The Peace River Drilling Company (PRD) is a private company, and has just completed its first year of operations. The company drills oil and gas wells. Because rigs are easier to move across dry or frozen ground, most of the drilling done by PRD occurs in the summer and winter seasons. PRD has a part-time accountant who has been responsible for recording most of the company's transactions and he is about to prepare the draft financial statements and needs some advice from you. The company has four major types of tangible assets: land, buildings, drilling rigs, and furniture. PRD has also just developed a new drill bit and has obtained a patent for it because of its unique design. The company has entered into a contract with a drill bit manufacturer that gives the manufacturer the right to use the unique design when producing its products in exchange for a royalty from the sale of these drill bits. The agreement expires in five years. The company plans to do a public issue of shares sometime in the next three years.

Instructions

(a) The accountant would like your advice on the method of depreciation that should be used for each tangible asset. Recommend a method with support.

(b) The accountant would like to know if intangible assets have to be amortized. If this is required, explain why, and describe the method that should be used and length of time over which the patent should be amortized.

(c) PRD has yet to decide if its financial statements will be prepared in accordance with IFRS or ASPE. Which set of accounting standards would you recommend the company choose and why?

(d) If PRD wanted to obtain a bank loan, which type of asset would the bank probably want to use for security on the loan? Which type of asset is least likely to be used as security? Why?

(e) The company has been approached by a leasing company that put forward a proposal to lease drilling rigs to PRD. Rather than buying a rig, the company would lease it for 15 years with a predetermined fixed monthly payment. Would the company likely record this lease as a finance lease or an operating lease? Explain.

(f) Because the drilling industry is in a mild recession, the company is not planning on buying any rigs or other major assets next year. Industry experts expect most drilling companies to maintain a level volume of sales revenue next year. What do you think will happen to the company's asset turnover ratio next year? How would you interpret this change in the ratio?