Question

During the year ended 30 June 2020, Resources Ltd explored four different areas of interest and spent $102,700 in each. The results of E&E activities suggested that Areas A, B and C may contain mineral reserves so the company acquired leases over these three areas. The leases cost $151,000, $202,300 and $176,400 respectively.

During the year ended 30 June 2021, Resources Ltd commenced a drilling program to evaluate Areas A, B and C. Eight exploratory wells were drilled, five in Area A, two in Area B and one in Area C at a cost of $108,600 each. The five wells drilled in Area A did not result in any mineral resource findings (i.e. they were dry holes). The two wells drilled in Area B 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 C as some mineral reserves were found but not enough to be considered economically recoverable at this stage. Therefore, Resources Ltd decided to continue E&E activities in Area C as of 30 June 2021. Area A was abandoned, and, after incurring costs of $49,100 to confirm the technical feasibility and commercial viability of extracting the mineral resources, development of Area B commenced.

During the year ended 30 June 2022, to evaluate the area of interest further, three more wells were drilled in Area B. Of these, two were dry. Each well cost $148,000. The successful wells in Area B were developed for a total cost of $326,500. Expenditure on additional plant and equipment related to development was $349,400. After further dry wells costing $183,800 were drilled in Area C, management concluded that Area C did not contain any commercially viable quantities of mineral resources, so it was abandoned.

These costs are summarised as follows.

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 Resources Ltd expenses all of its E&E costs as incurred.

Costs incurred for each area of interest				A		B		C		D		Total
30/06/2020		Exploration		102,700		102,700		102,700		102,700		410,800
		Leases		151,000		202,300		176,400		—		529,700
30/06/2021		Dry wells		543,000		—		—		—		543,000
		Other wells		—		217,200		108,600		—		325,800
		Technical feasibility/commercial viability costs		—		49,100		—		—		49,100
30/06/2022		Dry wells		—		296,000		183,800		—		479,800
		Other wells		—		148,000		—		—		148,000
		Development		—		326,500		—		—		326,500
		PPE		—		349,400		—		—		349,400
Total				796,700		1,691,200		571,500		102,700		3,162,100

Answer 1

Solution:For the year ended 30th june resources ltd explored four different areas(i.e,A,B,C,D) and spent $102700 in each .

The results suggested only three areas (A,B,C) may contain mineral reserves

So company acquired the leases over these three areas . The lease cost for the Area A -$151000,                      B-$202300, C-$176400.

For D area results shows negative so the cost incurred for the area should be transfer to profit and loss account.

But A,B,C results recommended may contain mineral reserves but not sure we can get the reserves so that any uncertain cannot be capitalized. So lease amount of these Areas and Exploration amount will be transferred to profit and loss account.

In june 30th june 2021 Eight exploratory wells were drilled, five in Area A, two in Area B and one in Area C at a cost of $108,600 each. The five wells drilled in Area A did not result in any mineral resource findings (i.e. they were dry holes). The two wells drilled in Area B 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 C as some mineral reserves were found but not enough to be considered economically recoverable at this stage. Therefore, Resources Ltd decided to continue E&E activities in Area C as of 30 June 2021. Area A was abandoned, and, after incurring costs of $49,100 to confirm the technical feasibility and commercial viability of extracting the mineral resources, development of Area B commenced.

Five wells drilled in Area A did not result any mineral resource findings –so $543000/8*=$339375 will be transferred to profit and loss account.

Two wells drilled in Area B discovered economically recoverable reserves of amount $543000/8*2=$135750 should be capitalized in balance sheet.

Area C one well drilled but management was uncertain about the likelihood of finding economically recoverable reserves for the well in Area C as some mineral reserves were found but not enough to be considered economically recoverable at this stage.so amount $543000/8*1=$135750 should be transferred to profit and loss account.Other wells and Technical feasibility relating to Area B amount should be capitalised

In 30 June 2022, to evaluate the area of interest further, three more wells were drilled in Area B. Of these, two were dry. Each well cost $148,000. The successful wells in Area B were developed for a total cost of $326,500. Expenditure on additional plant and equipment related to development was $349,400. After further dry wells costing $183,800 were drilled in Area C, management concluded that Area C did not contain any commercially viable quantities of mineral resources, so it was abandoned.

In Area B further three more well drilled but two were dry one is successful .So $148000*3=$444000 should be capitalized because it Area B has been recognized as asset in books of accounts.

Development cost related Area B should be capitalized .Additional Plant and equipment related to development $ 349400 should be capitalized has it is recognized as asset.Area C cost further wells drilled $183800 cost abandoned by management so it is transferred to profit and loss account.