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business
fundamental accounting

Questions and Answers of Fundamental Accounting

Data as of 12/31/18 for Upbeat Oil Company’s US properties are as follows:REQUIRED:a. Use T-accounts to accumulate costs.b. Calculate DD&A for 2019, assuming no cost exclusions and using a
Lamar Petroleum started its oil and gas exploration and production business by acquiring leases in both the United States and Canada. Data for 2018 and 2019 follow:REQUIRED:a. Record the above
The Libby Oil Corporation incurs unproved property (Lease A) costs of $60,000 on April 1, 2018. An 8% loan is obtained on April 1, 2018 for $500,000 to finance a drilling program. Libby started a
Determine the amount of the total amortization cost base, assuming (1) no exclusions from the amortization base, and (2) all possible costs are excluded from the amortization base. Unproved
Martinson Oil Company provides the following information for the year ended December 31, 2021, relating to its properties located in the United States:REQUIRED:a. Prepare a ceiling test and an entry,
Marvel Oil Corporation uses the full cost method of accounting. The following costs are incurred during 2019:During 2020, the following costs were incurred:Delay rentals were paid on Lease A, $2,000,
Dwight Petroleum has the following account balances at 12/31/21:The above properties are abandoned in 2022.REQUIRED: Record the abandonment entry assuming the abandonment does not significantly
Solar Energy Corporation has the following account balances at 12/31/21:At 12/31/21, Lease A is considered to be 40% impaired. Solar Energy’s estimated abandonment rate of insignificant unproved
Universal Oil and Gas Company has been using full cost accounting for 20 years.The following data relate to US properties as of 12/31/20.REQUIRED: Compute DD&A using the unit-of-revenue method.
Fitzgerald Corporation began operating on 1/1/18. At 12/31/18, the company owned the following leases in the United States:The production was sold at $150/bbl and $5.50/Mcf. Current prices at
Data for Hill Oil Company are as follows for all US properties:REQUIRED:a. Apply the full cost ceiling test and record any entries necessary, assuming that all possible costs are excluded from
Abbot Oil Corporation, located in Houston, Texas, has been operating for four years. Abbot uses full cost accounting and excludes all possible costs from the amortization base. The following account
Wildcat Oil Company began operations on 1/5/2021 and has acquired only two properties. The two properties, which are both considered significant, are located in different states. Lease B was proved
Burnout Oil Corporation uses the full cost method. Recently, the company acquired a truck costing $60,000 with an estimated life of five years (ignore salvage value). The foreman drives the truck to
When a full cost company impairs unproved properties, whether individually significant or not, the impairment is recorded by the following:a. Debiting an impairment accountb. Debiting impairment loss
When would the surrender or abandonment of an unproved property result in recognition of a loss?a. Loss is recognized any time an individually significant unproved property is abandoned.b. Loss is
When is the full cost ceiling test to be performed?a. Monthlyb. Quarterlyc. Annuallyd. Only when a trigger event occurse. None of these
When is a ceiling test write-down required?a. When the ceiling exceeds the total net capitalized costsb. When the total net capitalized costs exceeds the present value of future net revenues from
The full cost ceiling test is applied on _____________.a. A country-by-country basisb. A field-by-field basisc. A cash-generating unit basisd. A well-by-well basise. None of these
Which of the following costs would always be charged to expense under the full cost method? (Choose all that apply.)a. Exploratory dry holesb. Salary and benefits of a company geologistc. Salary and
Assume a US company performs the ceiling test at the end of the second quarter using end-of-quarter prices, which are $90/bbl. As a consequence of the test, the company books a ceiling write-down of
In full cost accounting, when oil and gas are produced jointly, what basis or units of measure are allowed for full cost DD&A?a. Relative energy content onlyb. Relative revenue onlyc. Either energy
Which costs or reserves must or may be excluded from amortization for full cost?(Choose all that apply.)a. All acquisition and evaluation costs directly associated with unproved properties other than
Define and discuss the following terms:tubular goodsgathering systemsworkover operationsshut-in payments
What factors are important in determining whether to plug or complete a well?
Indicate whether each of the following items is a directly attributable operating expense (D), an allocable operating expense (A), or a capital expenditure (C): Repairs that can be traced to
Texas Oil Company operates solely in the United States. The following amounts are paid during June 2018 relating to producing leases:REQUIRED: Record the above transactions. Fuel for Lease A.....
West Texas district office expenses were $50,000 for July 2018. The district office supervised the following three leases:REQUIRED:a. Record lease operating expense, assuming allocation based on the
Economy Oil Corporation has a waterflooding system for a reservoir in Oklahoma. Costs of operating the system for the month of July were $40,000.a. Give the entry to record operating expense,
Garcia Oil Company purchased new tubing and casing to replace damaged tubular goods in a well. The new tubular goods were installed in a producing well.The cost of the items were as follows:REQUIRED:
Halfax Petroleum incurs the following costs relative to a gathering system:a. Purchase and installation costs of separators and compressors: $500,000b. Operational costs for the system: $50,000
Oltman Petroleum data in connection with Lease A are as follows:REQUIRED: Should the well be completed, assuming the following total production? Discuss your answer. Property cost (acquisition
George Oil Corporation drilled a successful gas well. Although capable of production, the well was shut in awaiting the completion of a pipeline. Shut-in royalty payments of $2,000 per month were
Lincoln Petroleum has the following data in connection with Lease A:REQUIRED: Lincoln Petroleum is sole owner of the working interest. If reserves are determined to be 11,000 barrels, is the well
Clark Oil Company has the following expenditures in August 2019:REQUIRED: Record the above transactions. Lease A: Lease B: Well #2-Cleaning and reacidizing formation.... Well # 3-Testing,
Tyler Oil Corporation estimates the following costs to acquire, drill, and complete a well on Lease A:REQUIRED: Would the investment be profitable if proved reserves are:a. 12,000 bbl?b. 18,000
Bolton Energy Corporation drilled a successful gas well. Although capable of production, the well was shut in awaiting the completion of a pipeline. Shut-in royalty payments of $900 per month were
Craig Petroleum has been operating in the United States for 15 years. The company purchased new tubing and casing to replace damaged tubular goods in a well that has been producing for four years.
A saltwater disposal system is added to Lease A’s gathering system at a cost of $225,000. Assume the following acquisition costs and monthly operating expenses for the month of May 2018 is
Longhorn Oil and Gas Corporation operates the Flat Hill Basin. Along with oil, this field produces large quantities of salt water. The salt water is highly corrosive, and as a result, the downhole
Yost Petroleum is considering drilling one well on either the Rivera lease or the Cade lease in Texas. Force does not have sufficient funds to drill both wells and must decide which of the two wells
Seaside Corporation is considering beginning drilling operations in three separate fields. Seaside decides to analyze these fields using a 13% discount rate. The estimated cash flows for each field
Frank Oil Corporation is considering two alternatives for the installation of production equipment on the Panther Well in the Odessa West field. Alpha costs$275,000 and Beta costs $350,000. The
In project analysis, which method(s) do not permit the ranking of several competing investment options?a. Payback methodb. Accounting rate of returnc. Net present valued. Internal rate of returne.
What does the payback method use to rank projects?a. How long the invested money is at riskb. The relative size of the potential profitc. The number of years the well will be producingd. The size of
What is a serious shortcoming of the payback method?a. It is a complicated metric that is difficult to interpret.b. It is based on the time value of money.c. It ignores any cash flows that might
What is a serious shortcoming of the accounting rate of return method?a. It is a complicated metric that is difficult to interpret.b. It does not incorporate the time value of money.c. It ignores any
The _________ method indicates whether the future cash flow stream generated by an investment will yield a positive net present value when the cash flows are discounted using the company’s desired
The internal rate of return is the ___________ that would be required in order to generate an NPV of zero.a. Discount rateb. Amount of moneyc. Discounted cash flowd. Profitability indexe. None of
The IRR method assumes which of the following?a. All future cash inflows will be reinvested at the same rate of return as the IRR.b. None of the future cash inflows will be reinvested at the same
The IRR method allows a ranking of competing projects.a. Trueb. False
The ___________ method measures the proportion of the present value of dollars returned to dollars invested.a. IRRb. NPVc. Profitability indexd. Risk-adjusted paybacke. None of these
Define the following terms:asset retirement obligationretirementaccretionpromissory estoppellegally enforceable obligationobligating event
Are the following statements true or false?a. Full cost companies do not book AROs.b. An oral agreement to dismantle equipment and restore the environment at the end of the productive life of a
When are companies required to remeasure AROs, and what types of changes result in the re-measurement? How are changes recorded?
The CEO of Force Oil Company, Duncan Fife, gave a speech at the World Environmental Conference. In his speech, Mr. Fife spoke about Force Oil’s goal of doing no damage to the environment as a
What is a conditional ARO? How are conditional AROs to be accounted for?
Stephens Company operates a single field in Wyoming in which it has a 48%working interest. The remainder of the working interest is held by another oil company. The field went onto production in
Tadpole Oil and Gas Company completes construction of an offshore oil platform and places it into service on January 1, 2018. Tadpole is legally required to dismantle and remove the platform at the
Sauer Oil and Gas Company constructed a natural gas treatment facility in three phases. The first phase was completed and placed into service on December 31, 2018. The second phase was completed and
When are companies required to remeasure AROs at fair value?a. Annuallyb. When discount rates changec. When events and circumstances indicate that the underlying asset’s carrying value might not be
If the expected cash flow approach is used to estimate the fair value of an ARO, what discount rate should be used?a. Weighted average cost of capitalb. Credit-adjusted risk-free ratec. Incremental
Are full cost companies required to book AROs?a. Yes.b. No.c. It depends.
According to ASC 410-20, is an oral agreement between parties a legally enforceable obligation?a. Yes.b. No.c. It depends.
If a contract contains a provision that requires one party to perform retirement activities when the asset is retired, but it is more likely than not that the requirement will be waived, should an
If an ARO is to be remeasured, what discount rate should be used to measure the increment?a. The discount rate used to book the original AROb. The discount rate prevailing when the increment is
Define the following terms:impairmentasset grouptraditional present value approachexpected present value approach
For purposes of booking impairment, what is an asset group? In oil and gas operations, what asset groups are most common?
Give examples of events or circumstances that may trigger impairment testing.
Cameron Oil Company, a successful efforts company, has capitalized costs on Property R, Property S, and Property T as of 12/31/2018 as follows:Cameron has no other capitalized costs. The properties
Libby Oil Corporation, a successful efforts company, has capitalized costs on three leases as of 12/31/2019 as follows:Libby has no other capitalized costs. The leases are located in different
Terry Company, a successful efforts company, has 100% of the working interest in a field in Texas. The field constitutes a cost center and is also an asset group for purposes of testing for
Green Petroleum, a successful efforts company, began operations in 2018 with the acquisition of one field. Green proved the field during 2018. At the end of 2018, prices were high and costs low.
Gamma Petroleum owns 100% of the working interest in the Bearcat Field in Wyoming. The field has been producing for 3 years and is expected to produce for 10 more years. Since the state has very
Gamble Company, a successful efforts company, owns a working interest in an oil field in Alaska. The field has been producing for a number of years and is expected to be producing for another 10
When is a company required to test for impairment (according to ASC 360-10-35)?a. Annuallyb. When events or circumstances indicate that the asset’s carrying value may be recoverablec. When events
According to ASC 360-10-35, how would impairment be determined if an asset requires substantial future development expenditures in order to generate the estimated future cash inflows?a. The future
Why is the temperature of oil or gas important when measuring the volume of oil or gas sold?
Define the following terms:BS&Wgravitytank batteryLACT unitMcfminimum royaltyMMBtu
Define the following terms:run ticketsettlement statementthiefgaugingstrappingHenry HubWest Texas IntermediateNorth Sea Brent BlendDubai crude
Belmont Pipeline Company purchased 200 barrels of oil from Jadson Oil Company. The gross value of the oil was $20,000. The severance tax rate was 4%. Give the entry to record revenue for Jadson,
Mr. Stephens sold the surface rights and retained the mineral rights in some land in Texas. He leases the land to George Oil Company, reserving a 1/5 royalty.During 2019, George Oil Company makes the
Mountain Oil Company owns a 100% WI in a lease in Wyoming. The lease is burdened with a 1/5 royalty. During the month of July, a total of 10,000 barrels of oil was produced and sold. Assume the
During July, Session Oil Company sold 6,000 Mcf of gas at $10.00/Mcf. The lease provides a 1/6 RI. The working interest owner receives 100% of the revenues (net of 5% severance tax) and then
McGavin Oil Company obtained 200 Mcf of gas from Lease A and used the gas for gas injection on Lease B. The gas was valued at $12/Mcf. Assume production taxes are 5% and the royalty on Lease A is a
Wildcat Oil Company sold or used the gas produced on Lease A during March as follows:a. 600 Mcf used as fuel to operate lease equipmentb. 800 Mcf sold to R Company at $12/Mcf Assume a 1/7 RI and a
Libby Oil Company has a working interest in a remote lease located in Wyoming.Libby agreed to pay the royalty owner a minimum royalty of $500/month in addition to the 1/5 royalty. Gas production on
Complete the accompanying run ticket and give the entry to record the sale of the oil at $75/bbl assuming a severance tax rate of 5% and a 1/5 RI. The operator is Montgomery Oil Company and the run
Information from a run ticket shows that 2,000 net barrels of oil with an API gravity of 36º were sold. The selling price is based on a contract price of $90/bbl, adjusted downward 4¢ for each
Structure Oil Company made the following transactions in 2021:a. During the months of January through March, minimum royalty payments of$500/month were paid. The minimum royalty payments are
Garcia Company has a 100% WI in a lease in a remote area of Wyoming. The lease provides for a 1/5 royalty. Garcia produces and sells a total of 150,000 Mcf of gas from the property during August. Of
Determine the barrels of production allocated to each well given the following data:Round the ratio to three decimal places and round barrels to the nearest whole barrel. Well 24-hr Test, bbl 40 50
Bryant Oil Company produced a total of 1,000 barrels of oil in June 2022. The expected selling price was $120/bbl. The purchaser pays the severance taxes and the royalty interest owner and remits the
Launch Oil Company owns a working interest in the Carpenter Lease in Texas.The lease is burdened with a 3/16 royalty interest. During April, a total of 4,000 barrels of oil is sold at $90/bbl to a
Michael Oil Company operates Leases X and Y. Michael Oil transfers 60 barrels of oil from Lease X to Lease Y to be used as fuel on Lease Y. The current spot oil price is $110/bbl, and the severance
A lease operated by Rocky Oil Company produces a total of 3,000 barrels of oil in June. The oil is sold in October. The posted field price and the actual selling price is $100/bbl. The severance tax
Pam O’Neal owns some mineral rights in Oklahoma that she leases to Sunshine Oil Company, reserving a 1/8 royalty interest. During 2021, Sunshine Oil made the following assignments:a. To Ted Mair,
Kincaid Oil Company sells 20,000 (gross) Mcf of gas at $9/Mcf. The lease is burdened with a 1/6 RI, and the working interest owner has assigned an ORI of 1/10. The severance tax rate is 7%.REQUIRED:
Jackson Oil Company’s production for Lease A and Lease B is gathered into a common system and sold. Total sales for the month of July are 6,562 barrels.Assume the following data for Lease A and
Hill Company’s production from each well on Lease C and Lease D is estimated based on a 24-hour test. Oil produced from each well on each lease is commingled and measured before leaving each lease.

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