Provision

On 1 October 20X3, Xplorer commenced drilling for oil in an undersea oilfield. The extraction
of oil causes damage to the seabed which has a restorative cost (ignore discounting) of
$10,000 per million barrels of oil extracted. Xplorer extracted 250 million barrels of oil in the
year ended 30 September 20X4.
Xplorer is also required to dismantle the drilling equipment at the end of its five?year licence
This has an estimated cost of $30 million on 30 September 20X8. Xplorer’s cost of capital is
8% per annum and $1 has a present value of 68 cents in five years’ time.
What is the total provision (extraction plus dismantling) which Xplorer would report in its
statement of financial position as at 30 September 20X4 in respect of its oil operations?
A $34,900,000
B $24,532,000
C $22,900,000
D $4,132,000

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