West Oil Company produced 12,000 barrels of oil in May that is sold in July at$55/bbl. The expected selling price was $50/bbl. The purchaser will pay the royalty owner and the production taxes. The production tax rate is 6% and the royalty interest is 1/8. West’s manager recorded $600,000 as oil revenue and $36,000 as production tax expense and tax payable at time of the sale. The CEO of West Oil Company wants you to review the given numbers and provide the necessary entries and calculations at (a) time of production and (b) at time of sale. In addition, he wants to know which accounting principle did you apply in parts (a) and (b)? how the application of this principle is different in the oil and gas sector? Explain your answer.
West Oil Company produced 12,000 barrels of oil in May that is sold in July at$55/bbl. The expected selling price was $50/bbl. The purchaser will pay the royalty owner and the production taxes. The production tax rate is 6% and the royalty interest is 1/8. West’s manager recorded $600,000 as oil revenue and $36,000 as production tax expense and tax payable at time of the sale. The CEO of West Oil Company wants you to review the given numbers and provide the necessary entries and calculations at (a) time of production and (b) at time of sale. In addition, he wants to know which accounting principle did you apply in parts (a) and (b)? how the application of this principle is different in the oil and gas sector? Explain your answer.
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