Company Z owns a 100% WI in a proved property with net capitalized costs of $100,000. Company Z sold the property for $250,000 cash and a production payment of $150,000 plus interest of 10% to be paid out of the proceeds from the first 60% of the oil produced. The fair market value of the production payment interest is estimated to be $50,000. Company Z uses the successful efforts method. How would Company Z account for the production payment if satisfaction of the retained production payment is not reasonably assured? Assume the companies use the successful efforts method.

a. Company Z records a receivable for the production payment in the amount of the present value of the production payment and recognizes a gain or loss on the sale of the working interest.

b. Company Z records a receivable for the production payment in the amount of the present value of the production payment and recognizes a loss on the sale of the working interest. Gain recognition is not permitted.

c. To the extent that the production payment’s fair market value can be determined, the unamortized cost of the working interest should be allocated between the interest sold and the interest retained, and a gain or loss recognized on the interest sold.

d. To the extent that the production payment’s fair market value can be determined, the unamortized cost of the working interest should be allocated between the interest sold and the interest retained, and a loss recognized on the interest sold. Gain recognition is not permitted.

e. None of these applies.