Flower Company owns a 100% WI in an unproved property for which it paid $80,000. The property
Question:
Flower Company owns a 100% WI in an unproved property for which it paid $80,000.
The property is burdened with a 1/8 royalty. Flower Company agrees to farm-out the WI to Barrel Company and retain a 1/7 ORI in return for Barrel Company agreeing to drill, develop, and operate the property. During 2005, Barrel Company incurs costs of \($200,000\) in drilling a well and \($100,000\) to equip the well. The total proved reserves are estimated to be 300,000 barrels and proved developed reserves are 100,000 barrels.
Production during 2005 totaled 20,000 barrels, which was sold for \($20\) per barrel. Ignore severance tax and assume Barrel Company pays the RI and ORI owners.
a. Give the entries that would be made by Flower Company assuming it uses the SE method.
b. Give the entries that would be made by Barrel Company assuming it uses the SE method.
Step by Step Answer:
Fundamentals Of Oil And Gas Accounting
ISBN: 9780878147939
4th Edition
Authors: Rebecca A. Gallun, Ph.D. Wright, Charlotte J, Linda M. Nichols, John W. Stevenson