The time to drill a well from start to completion may vary from 3 to 18 months, depending on the location. Further, the costs to drill two or more wells may be difficult to separate. For example, the second well may be easier to drill because more is known about the conditions of the field or reservoir, and the second well may be drilled to help extract the same reserves more quickly or efficiently.

Required:

a. In Figure 6-11, the source documents for the fixed asset accounting system come from the receiving department and the AP department.

For an oil and gas firm, where do you think the source documents come from?

b. Assume that a second well is drilled to help extract the reserves from the field. How would you allocate the drilling costs?

c. The number of reserves to be extracted is an estimate. These estimates are constantly being revised. How does this affect the fixed asset department’s job? Does Figure 6-13 need to be altered to reflect these adjustments?

d. How does the auditor verify the numbers that the fixed asset department calculates at the end of the period?

Transcribed Image Text:

WILDCAT EXPLORATION COMPANY P.O. Box 5478 Baton Rouge, Louisiana 56758 JOINT INTEREST BILLING INVOICE DATE: August 23, 2007 INVOICE NO.: DNS3948 TERM: net 20 days from receipt BILLING PERIOD: September 19-August 19, 2008 Property: Dutch North Sea-K/11 Percentage Interest: .1875 DESCRIPTION TOTAL AMOUNT PERCENTAGE DUE Tubing Wellhead Assembly Installation Cost 6,981.38 Permits 3,297.28 $291,876.69 976.25 $ 37,851.88 183.05 1,309.01 618.24 Site Prep & Cleanup 4,298.78 806.02 Contract Drilling 415,345.82 77,877.34 Bits 7,394.12 1,386.40 Equipment Rental 8,109.33 1,520.50 Communications 812.77 152.49 Testing and Drafting 15,980.23 Inspection Completion Costs 3,980.13 1,980.11 2,996.29 746.27 371.27 TOTAL $761,032.89 $125,818.76