Peppel Corporation acquired a newly constructed oil platform as well as the licence to extract...

Question

Peppel Corporation acquired a newly constructed oil platform as well as the licence to extract oil from an offshore oilfield in the Gulf of Mexico
for 10 years. The cost of the platform and the licence cost $50m. Under the licence, the company has to remove the platform at the end of 10
years and restore the sea bed to an environmentally satisfactorily condition. The estimated cost of this is $20m. The present value of $1
eceivable in 10 years at the appropriate discount rate of 9% for Peppel Corporation is 0.42.
Required:
i) Explain how the offshore oil platform should be treated in the financial statements of
Peppel Corporation for the year ended 31 December 2012. (6 marks)
Ans: The investment in Offshore Oil platform by Peppel Corporation is a kind of capital expenditure as this investment is made to get the oil
extracted over the next ten years. Hence the $ 50 Million will be treated as fixed asset in the books of Peppel Corporation. Now with respect to
estoring the sea bed, Peppel need to discount the $20 Million with the discounting factor 0.42 and apportionment of the same need to be
apportioned over the next ten years as expenditure.
ii) Show extracts of the following for Pepple Corporation:
- Statement of financial position as at 31 Dec 2012
- Statement of comprehensive income for the year ended 31 Dec 2012
(5 marks)
Ans: - statement of financial position as at 31 Dec 2012 - $50 Million as fixed asset,
-...

David · Accepted Answer

Peppel Corporation acquired a newly constructed oil platform as well as the licence to extract oil from an offshore oilfield in the Gulf of Mexico 
for 10 years. The cost of the platform and the licence cost $50m. Under the licence, the company has to remove the platform at the end of 10 
years and restore the sea bed to an environmentally satisfactorily condition. The estimated cost of this is $20m. The present value of $1 
receivable in 10 years at the appropriate discount rate of 9% for Peppel Corporation is 0.42. 
Required: 
i) Explain how the offshore oil platform should be treated in the financial statements of 
Peppel Corporation for the year ended 31 December 2012. (6 marks) 
Ans: The investment in Offshore Oil platform by Peppel Corporation is a kind of capital expenditure as this investment is made to get the oil 
extracted over the next ten years. Hence the $ 50 Million will be treated as fixed asset in the books of Peppel Corporation. Now with respect to 
restoring the sea bed, Peppel need to discount the $20 Million with the discounting factor 0.42 and apportionment of the same need to be 
apportioned over the next ten years as expenditure.
ii) Show extracts of the following for Pepple Corporation: 
- Statement of financial position as at 31 Dec 2012  
- Statement of comprehensive income for the year ended 31 Dec 2012 
(5 marks) 
Ans: - statement of financial position as at 31 Dec 2012 - $50 Million as fixed asset,

Peppel Corporation acquired a newly constructed oil platform as well as the licence to extract oilfrom an offshore oilfield in the Gulf of Mexico for 10 years. The cost of the platform and thelicence...

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