Intermediate Accounting
1st Edition
ISBN: 9780132162302
Author: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella
Publisher: PEARSON
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Question
Chapter 11, Problem 11.42E
a.
To determine
To prepare: The
b.
To determine
To prepare: The journal entry to record the exploration cost by using the successful effort method.
c.
To determine
To prepare: The journal entry to record the depletion expense under the unit of output approach by using the full cost method and successful effort method.
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Full Cost versus Successful Efforts Method. During the current year, The Calgary Oil & Gas Company began an exploration project in Montana. The company had paid $1,500,000 for the drilling rights on a tract of 500 acres of land. The company then spent another $180,000 building roads and containment ponds. The project called for eight exploratory wells to be drilled at an expected cost of $130,000 per well. The first eight wells drilled were found to be "dry" (lacking commercially viable quantities of oil or gas); however, both the ninth and tenth wells drilled contained commercially viable quantities of oil condensate. Consequently, two additional development wells were drilled at a cost of $140,000 per well.
For income tax reporting purposes, should the company use the full cost method or the successful efforts method? which method should the company use when reporting its financial results to its shareholders? why?
Full Cost versus Successful Efforts Method. During the current year, The Calgary Oil & Gas Company began an exploration project in Montana. The company had paid $1,500,000 for the drilling rights on a tract of 500 acres of land. The company then spent another $180,000 building roads and containment ponds. The project called for eight exploratory wells to be drilled at an expected cost of $130,000 per well. The first eight wells drilled were found to be “dry” (lacking commercially viable quantities of oil or gas); however, both the ninth and tenth wells drilled contained commercially viable quantities of oil condensate. Consequently, two additional development wells were drilled at a cost of $140,000 per well. Calculate the capitalized cost of Calgary’s oil reserves under (a) the full cost method and (b) the successful efforts method
Question.
Fitzgerald Oil and Gas incurred costs of $8.25 million for the acquisition and development of a natural gas deposit. The
company expects to extract 3 million cubic feet of natural gas during a four-year period. Natural gas extracted during
years 1 and 2 were 700,000 and 800,000 cubic feet, respectively. What was the depletion for year 1 and year 2?
Chapter 11 Solutions
Intermediate Accounting
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