Answer:
Here we have three transaction and we have to deal these in-accordance to International Accounting Standard 16 Property, Plant and Equipment. The standard says that the Purchases of the Non-current assets must be capitalized as Non-current assets. Furthermore, if their is an estimated life of the asset then it must be depreciated. Here the life of oil reserve can be estimated by the number of oil barrels which is 1,000,000 barrels. So it must be depreciated according to the number of barrels extracted from the oil reserve. According to the IAS 16, the geological surveys must be expensed out in the year in which this expense was incurred.
Explanation:
Now we will record the all the three transactions for the year as below:
Purchase of NCA:
Dr Oil Reserve $6,900,000
Cr Bank $6,900,000
Depletion of Asset:
Dr Depreciation Expense $565,800
Cr Accumulated Depreciation $565,800
The depreciation is calculated as under:
The depreciation of the asset will be calculated according to fair method that represents the fair decrease in its value. In the case of oil reserve, depletion of the asset is not due to its life period it is depends upon the quantity of barrels extracted.
Now,
Depreciation = Asset Monetary Value * Barrels extracted / Total Barrels
Depreciation = $6,900,000* 82,000 barrels/ 1,000,000 total barrels
Depreciation Expense for the year= $565,800
Geological Tests:
The third transaction relates to geographical survey, which must not be capitalized and must be expensed out in the year in which it was incurred:
Dr Geological tests $570,000
Cr Bank $570,000