Reference no: EM131799802

Assignment

Railway Ltd commences exploration at three sites on 1 July 2013. On 30 June 2014 it has identified the following costs.

Year                Track                   Locomotive                Bogey
2014          $20,000,000             $15,000,000          $12,000,000

At the end of 2014, oil of an economically recoverable nature is discovered at Track, but Locomotive is abandoned. No decision has been made regarding Bogey since a reasonable estimate cannot be made due to lack of sufficient information.

Following the discovery of oil at Track, property, plant and equipment costs of a fixed nature of $3,000,000 were incurred in 2015. Portable buildings, with a life of 8 years, are also installed. These buildings cost $800,000. It is decided that all exploration and evaluation assets relate to Property, Plant and Equipment.

Production at Track begins in 2015. It is envisaged that the Track site contains 1,200,000 barrels of oil. The sale price of each barrel is $80. The incremental production costs associated with each barrel are $6. During 2015, 500,000 barrels are extracted, of which 280,000 are sold.

REQUIRED:

a) Prepare the necessary journal entries for 2014 and 2015 using the Area-of-Interest Method.
b) Briefly explain the basis that should be used to amortise carry forward costs where production is not limited by time.