Question

On December 2, 2018, one of the oil and gas division’s wells exploded. It leaked a significant amount of oil into a nearby stream until it could be repaired. The repair was completed on December 27, 2018, but remediation of the site has just begun. It cost $800,000 to repair the well, as a number of attempts initially failed, and new components had to be fabricated to replace the damaged parts. Our CEO issued a press release soon after the explosion, stating that the company will bear the full cost for cleaning up the damage and returning the site to its original condition. It is estimated that it will cost between $2 million to $4 million to fully remediate the site. The process of remediation will likely take several years, as the process of cleaning up the site and the nearby waterway is complicated. What are the key financial reporting issues? Where possible. What is the potential impact of the issue on the balance sheet and income statement, and explain why an adjustment is required? If there are areas where judgment is involved, or the accounting treatment is not clear. What are the alternatives that are available and factors that need to be considered in choosing an alternative?

Answer 1

Answer:

The repair costs of $800,000 being of the substantial amount must be capitalized as it will enhance the worth of the oil and gas system. The outlay of mutilation will be stated as the contingent liability as the expenditure is an approximation only. The contingent liability will stated with the maximum amount that is $400,000. The repair cost will augment the asset balance of the oil and gas system in the balance sheet while the contingent liability will be provided as notes to account.