Repsola is a drilling company that operates an offshore Oilfield in Feeland. Five yearsago, Feeland had a major oil discovery and granted licenses to drill oil to reputable,experienced drilling companies. The licensing agreement requires the company toremove the oil rig at the end of production and restore the seabed. Ninety percent ofthe eventual costs of undertaking the work relate to the removal of the oil rig andrestoration of damage caused by building it and ten percent arise through theextraction of the oil. At the Statement of Financial Position (SOFP) date (December 312025), the rig has been constructed but no oil has been extractedOn January 1st 2023, Repsola obtained the license to construct an oil rig at a cost of$500 million. Two years later the oil rig was completed. The rig is expected to beremoved in 20 years from the date of acquisition. The estimated eventual cost is 100million. The company’s cost of capital is 10% and its year end is December 31st. Repsolauses straight line depreciation for its non-current assets.Requirements:a) Explain if a provision should be made at the current SOFP date for:(i) the removal of the rig and restoration of the seabed (ii) restoration cost for extraction of the oil
Repsola is a drilling company that operates an offshore Oilfield in Feeland. Five years
ago, Feeland had a major oil discovery and granted licenses to drill oil to reputable,
experienced drilling companies. The licensing agreement requires the company to
remove the oil rig at the end of production and restore the seabed. Ninety percent of
the eventual costs of undertaking the work relate to the removal of the oil rig and
restoration of damage caused by building it and ten percent arise through the
extraction of the oil. At the Statement of Financial Position (SOFP) date (December 31
2025), the rig has been constructed but no oil has been extracted
On January 1st 2023, Repsola obtained the license to construct an oil rig at a cost of
$500 million. Two years later the oil rig was completed. The rig is expected to be
removed in 20 years from the date of acquisition. The estimated eventual cost is 100
million. The company’s cost of capital is 10% and its year end is December 31st. Repsola
uses straight line depreciation for its non-current assets.
Requirements:
a) Explain if a provision should be made at the current SOFP date for:
(i) the removal of the rig and restoration of the seabed
(ii) restoration cost for extraction of the oil
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