Farm Boy Ltd Exploration and Evaluation Costs

Question Description

Farm Boy Ltd incurs $18,000,000 and $16,000,000 exploration and evaluation costs at two sites, Mango and Banana, respectively, in 2020. In relation to the above expenditure, 30 percent relates to intangible assets and the balance of the expenditure relates to property, plant and equipment.
In 2021, oil of an economically recoverable nature is discovered at Site Banana, but Site Mango is abandoned.
Development costs of $3,000,000 are incurred at Banana in 2021. This development cost includes $2,000,000 in property, plant and equipment and $1,000,000 in intangibles. This expenditure will be depreciated/amortised on a production basis.

Production at Banana starts in 2022 financial year. Banana is estimated to have 120,000 barrels of oil. The current sale price is $12,000 per barrel. During 2022, 1,500 barrels are extracted at a total production cost of approximately $1,200,000. Assume that the company’s financial year starts on 1 January and closes on 31 December.


Provide the necessary journal entries for FarmBoy Ltd for 2020, 2021 and 2022 using the area-of-interest method. Assume preproduction costs are amortised or depreciated using the production-output method. (Exclude journal narrations.)