Ernest Petroleum began operations January 1, 2015. Transactions for the first three years include the data below.

Question:

Ernest Petroleum began operations January 1, 2015. Transactions for the first three years include the data below. Using that data:

a. Prepare journal entries assuming full cost (ignore revenue entries and assume no exclusions from the amortization base).

b. Prepare income statements under full cost and successful efforts for all three years, again assuming no exclusions from the full cost amortization base. Ignore severance tax. Assume a 1/8 royalty interest.

c. Recalculate DD&A assuming Ernest is a full cost company and that Ernest excludes all possible costs from the amortization base.

d. Which of the journal entries given in part a above would have been different if Ernest had been excluding all possible costs from the amortization base rather than including all costs? image text in transcribed

2016
1) A delay rental of $$2,000$ is paid for Lease B.
2) A delay rental of $$4,000$ is paid for Lease A.
3) Drilling costs of $$120,000$ are paid on Lease C. Proved reserves are found and estimated to be 200,000 total gross barrels, and proved developed reserves are estimated to be 70,000 total gross barrels as of December 31, 2016. During 2016, 20,000 total gross barrels of oil are produced and sold. Lifting costs are $15/bbl, and the selling price is $65/bbl. (Expense lifting costs as lease operating expense.)
Future development costs are estimated to be $100,000.

2017
1) Lease B is surrendered.
2) A dry hole is drilled on Lease A at a cost of $$250,000$. As a result, Ernest feels that Lease A is worth only 1/4 of the amount capitalized as unproved property. (Note:
successful efforts and full cost impairment amounts will be different.)
3) An additional well (development) is drilled on Lease C at a cost of $300,000.
Proved reserves at 12/31/17 are estimated to be 230,000 total gross barrels, and proved developed reserves are estimated to be 90,000 total gross barrels.
During 2017, 25,000 total gross barrels of oil are produced and sold for $70/bbl. Lifting costs are $14/bbl. Future development costs are estimated to be $150,000.