Laredo Oil Corporation began operations in June 20XA. Laredo Oil is classified as an independent producer. During the first 2½ years of operation, Laredo Oil acquired only two US properties, which were noncontiguous. Costs incurred on those properties during those 2½ years are given below, net of accumulated DD&A. Laredo Oil drilled three dry holes and one successful well. No equipment was salvaged from the dry holes. Production on the successful well started on January 1, 20XB. During 20XC, Laredo Oil incurred total IDC of $100,000 on Lease A (in wells-in-progress—

IDC at 12/31/20XC) and $200,000 on Lease B (in wells-in-progress—IDC at 12/31/20XC). All 20XC IDC on both leases was incurred early in May. All reserve, production, and sales data below apply only to Laredo Oil Corporation.

Laredo Oil also placed in service on 1/1/20XB a building that cost $117,000 and has a life of 25 years, with a salvage value of $7,000. The building houses the corporate headquarters that supports oil and gas operations in the United States and non–oil and gas operations in Mexico. The operations conducted in the building are general in nature and are not directly attributable to any specific exploration, development, or production activity. The building is not directly related to exploration, development, or production and supports activities in more than one cost center. As such, it is depreciated using straight-line depreciation for financial accounting.

REQUIRED:

a. Compute DD&A for 20XC for the following accounting methods assuming that Laredo is an independent producer:
1) Successful efforts.
2) Full cost, assuming inclusion of all possible costs in the amortization base. Ignore the revenue method.
3) Tax: Ignore percentage depletion, use proved reserves to compute cost depletion, and assume that the cost of the equipment and the building are gross costs.

b. Calculate DD&A for tax, assuming instead that Laredo is an integrated producer.

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Costs incurred 6/20XA through 12/20XC: Related G&G costs Lease A Lease B $ 20,000 $40,000 Bonus.... 30,000 50,000 Delay rentals, cumulative.. 10,000 5,000 Wells-in-progress-IDC (at 12/31/20XC) Dry exploratory wells-IDC.. 100,000 200,000 250,000 300,000 Dry exploratory wells-L&WE. Successful exploratory well- IDC. Successful exploratory well-L&WE. Dry development wells-IDC... Dry development wells-L&WE. Other data Future development costs Production...... Sales...... 300,000 20,000 bbl 18,000 bbl Proved reserves, 12/31/20XC 600,000 bbl Proved developed reserves, 12/31/20XC. 200,000 bbl 50,000 75,000 400,000 150,000 200,000 100,000