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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 $4,132,000Can someone help me understand how the total provision is calculated?
I can help you if you show me what you’ve calculated first. I’m not here to just outright answer the questions for you. If you attempt it I can then show where you’ve gone wrong and correct your answer. This is a much better way of learning.
Thank you so much for your reply! I had gone over the question once again after i posted my doubt and I rectified my error. It was miscalculation on my end and i have since gone over the theory and managed to gain a much clearer understanding.
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