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Hi My Dear Tutor,i have a question.
On 1 october 2015, Borough commenced the extraction of crude oil from a new well on the seabed.The cost of a 10-year licence to extract the oil was $50 million.At the date of the extraction, Borough intends to make good the damage the extraction has caused to the seabed.the cost of this will be a fixed amount of $20 million and a variable amount of $0.02 per barrel extracted .Both amounts are present values as at 1 october 2015 (discounted 8%) of the estimated cost in 10 years’ time.in the year to 30 september 2016 Borough extracted 150 million barrels of oil.
My question here is that provision is 23 (20million +150*0.02=3) million and asset is 70(50+20) why we do not add or capitalise 3 million over 70?
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