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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 $4,132,000Restoration at the rate of $10,000 per million barrels extracted
So 250 million barrels x $10,000 = $2,500,000
Dismantling $30,000,000 at present value =
$30,000,000 x .68 = $20,400,000
Total provision $22,900,000
What is there not to understand?
Hi tutor I asked you the above question, you solved it and asked me What is there not to understand?
Before I could answer that, you closed the topic to new replies. According to your (and my) solution, the answer is option C but according to dec 2014 ACCA past paper, the correct answer is option B. This is what I don’t understand.Ah, that’s sneaky.
The provision for dismantling was estimated as at 1 October 2013 but we are now 1 year further on so we need to unroll the discounted provision by 1 year at 8%
Too much haste, too careless
Restoration at the rate of $10,000 per million barrels extracted
So 250 million barrels x $10,000 = $2,500,000
Dismantling $30,000,000 at present value =
$30,000,000 x .68 = $20,400,000 present value as at 1 October, 2013
But we are asked for the provision 1 year later so we need to unroll by 1 year at 8%
$20,400,000 unrolled at 8% for 1 year = $20,400,000 x 1.08 = $22,032,000
So provision required at 30 September 2014 is $24,532,000
I say again – What is there not to understand?
!!!!
“2,500,000+20,400,000+22,032,000”
When you unroll $20,400,000 at 8% you arrive at $22,032,000
But this figure $22,032,000 replaces the provision amount from last year ($20,400,000)
You can’t keep that $20,400,000 in each year. As it’s unrolled it is replaced by the increased unrolled amount
OK?
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