Reference no: EM132573609

Point 1: In 2019, Ashley Resources Ltd explored two different areas of interest and spent $340,000 for Area X and $260,000 for Area Y. The results of exploration and evaluation (E&E) activities suggested that Areas X and Y may contain mineral reserves, so the company acquired leases over these two areas. The leases cost $300,000 for each area.

Point 2: In 2020, Ashley Resources Ltd commenced a drilling program to evaluate Areas X and Y. Two exploratory wells were drilled in Area X and one in Area Y at a cost of $240?,000 each. The two wells drilled in Area X indicated that the company had discovered economically recoverable reserves. Management was uncertain about the likelihood of finding economically recoverable reserves for the well in Area Y. Therefore, Ashley Resources Ltd decided to continue E&E activities in Area Y. After incurring costs of $120?,000 to confirm the technical feasibility and commercial viability of extracting the mineral resources, development of Area X commenced.

Point 3: In 2021, to evaluate the area of interest further, three more wells were drilled in Area X. Of these, two were dry. Each well costs $250?,000. The successful wells in Area X were developed for a total cost of $600,000. After further dry wells costing $150?,000 were drilled in Area Y, management concluded that Area Y did not contain any commercially viable quantities of mineral resources, so it was abandoned. Assume that the company's financial year starts on 1 January and closes on 31 December.

REQUIRED

Question 1: Determine what amounts would be recognised as an expense (in the profit or loss) versus capitalised as an asset, in relation to each area of interest for each financial year assuming Ashley Resources Ltd capitalises successful E&E costs on an area of interest basis (i.e., expenses dry holes).