On January 1, 20XA, Granger Oil Corporation bought a developed lease for

$300,000. During 20XA, Granger Oil Corporation incurred $600,000 of IDC on a successful well. Reserves of 400,000 barrels were discovered, and 20,000 barrels were produced and sold. Gross income from production was $2,000,000.

On January 4, 20XB, the company sold the property for $700,000. All reserve, production, and sales data apply only to Granger Oil Corporation.

REQUIRED:

a. Determine the amount of ordinary income and the amount of any capital gain assuming Granger Oil is an integrated producer and that part of the IDC is capitalized as required. Assume that all of the IDC was incurred on April 1, 20XA.

b. Determine the amount of ordinary income and the amount of any capital gain assuming an independent producer, percentage depletion of 15%, and that all the IDC was expensed as incurred. Ignore the 100% and 65% limitations.