MCQ 17 – dec 14 exam

Thank you for posting answers for MCQ’s. Can you please have a look at this solution for MCQ 17?

Your answer was C

so we have the restorative cost of $2,500,000
then we need to add the dismantling provision value at 30 Sept 2013 – 0.68*30 mln=20,400,000
however, since we’re interested at the provision amount one year later – ie Sept 30 2014, we need to unwind the discount for 1 year -> 0.08*20,400,000=1,632,000.
when we add these three together -> we get answer B

17 On 1 October 2013, Xplorer commenced drilling for oil from 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 2014.

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 2018. 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 2014 in respect of its oil operations?

A $34,900,000
B $24,532,000
C $22,900,000
D $4,132,000