Question

Costs that have been carried forward for a specific area of interest are to be amortised against revenue earned during the production phase. How is the amortisation of the costs to be calculated?

Select one:
a. Any generally accepted amortisation method may
be used except for the inverted sum-of-years-digits method.
b. The costs should be amortised in proportion to
the expected revenue stream, so that a higher proportion of costs are matched
against higher revenue streams, especially where they occur as a result of
greater quality product in the early years of production.
c. The costs should be amortised straight-line over
a period of not greater than 20 years.
d. The costs should be allocated over the life of the economically recoverable reserve in terms of production output or in terms of time in circumstances such as where there is a fixed period of tenure or the limiting factor is the length of the mining right.

Answer 1

Answer is option d)

Explanation:

The cost that has been carried forward should be amortised based on production output or in terms of circumstances driven like fixed tenure or any other limiting factor or length of mining right. The amortisation method should be appropriate to the carried forward amount and the usage of specific interest in the business. The amortisation method cannot be as per a) and c) given in question because the amortization should match the revenue generated as per matching concept of accounting principle. Answer b) is no appropriate because revenue does not influence the amortization expense. The amortization cost is incurred to generate the revenue and not vice versa. Answer d) is more appropriate and correct as it represents the usage of asset in business to generate revenue.