Mine’s Life Under Commonwealth Legislation

Mine’s Life Under Commonwealth Legislation

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In January 2019 XYZ Oil Ltd acquired a permit to explore for and produce oil in an area located in Bass Strait. The financial year of XYZ Oil Ltd ends on 30 June each year. XYZ Oil incurred, and capitalized, the costs shown below:

In June 2022, the company’s experts estimated that the deposit would produce 22.5 million barrels of oil to be profitably extracted over the production period of 10 years allowed by the company’s permit. On the basis of this information, XYZ Oil announced that production in the area would commence on 1 July 2023.

On 30 June 2023, engineers estimate that development and construction activities have resulted in $800,000 worth of restoration costs that XYZ Oil Ltd is obligated to spend at the end of the mine’s life under commonwealth legislation. The company nominates a discount rate of 6% as relevant for its oil operations.

The useful life of the oil rig and helicopter landing site was 15 years starting on the date production commenced. The oil rig and helicopter landing site cannot be economically removed from the site.

The sea-going vessels had a useful life of 18 years commencing on 1 July 2023 and will be used for access to a production site off Western Australia – expected to be operational by the time production finishes in Bass Strait. The estimated useful life of the production equipment was 5 years from 1 July 2023. All disposal values at the end of relevant useful lives were zero.

Activities for the year ended 30 June 2024 were as follows:

Production and sales (in barrels):

Barrels of oil produced 2,500,000

Barrels of oil sold 2,200,000

Revenues and costs:

Selling price of oil $55 per barrel

Production costs (excluding depreciation and amortization) $81,325,000

Head office administration expenses allocated $4,500,000

Selling expenses $3,000,000

REQUIRED:

Assume all costs incurred during the exploration and evaluation phases were capitalized, for the year ended 30 June 2024:

What is the amortization rate and amortization expense?

What is the depreciation expense related to the following assets?

the oil rig and helicopter landing site

sea-going vessels

production equipment

For each asset, briefly justify the choice of depreciation method.

What is the finance cost related to the restoration costs?

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