Reference no: EM132634645

Question - Mining Ltd commences operations on 1st January 2018. During 2018, Mining Ltd explores three areas and incurs the following costs:

Exploration and Evaluation Expenditure ($M)

Labasa 40

Tavua 20

Ba 35

In 2019 Oil is discovered at the Labasa site. Tavua Site is abandoned. Ba Site has not yet reached a stage that permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in the area of interest are continuing. In relation to the exploration and evaluation expenditures incurred at Labasa site and the Ba site, 75% of the expenditures relate to property, plant and equipment and the balance relates to intangible assets.

In 2019, development costs of $30 million are incurred at Ba site (to be written off on a production basis). $21 million of this expenditure relates to property, plant and equipment, and the balance relates to intangible assets. Labasa site is estimated to have 10,000,000 barrels. The current sale price is $28 per barrel. Three million barrels are extracted at a production cost of $2.85 million and 2.1 million barrels are sold.

Required -

a) Prepare the journal entries using The full - cost method.

b) Would the full - cost method or the area - of - interest method of accounting for the extractive industries provide a greater volatility of earnings.