French Company signed a lease agreement with Rita Mack covering 900 acres in Oklahoma. Ms. Mack received

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French Company signed a lease agreement with Rita Mack covering 900 acres in Oklahoma. Ms. Mack received a bonus of \($50,000\) and a 1/5 RI and French Company received 100% of the WI.

On 1/1/2008, French Company enters into an agreement with Donald Oil Company wherein French Company assigns its WI and retains a 1/4 ORI. Donald agrees to pay all of the cost to drill a well on the property. If the well is successful, Donald Oil Company will pay all of the operating costs and retain the net profit (after payment of the royalty, ORI, and operating expenses) until it has recovered the cost of drilling and completing the well. At that point French Company’s ORI will revert to a 45% WI.

During November 2008, Donald Oil Company drills Well No. 1 at a cost of $210,000.

The well is successful. Estimated proved reserves total 400,000 barrels and proved developed reserves are 200,000 barrels. During 2009 and 2010, 15,000 barrels per year are produced and sold for \($20\) per barrel. Operating costs are \($5\) per barrel. Ignore severance tax and assume reserve estimates do not change. Donald pays the RI and ORI owners.

Compute payout. Prepare all of the entries that would be made by both French Company and Donald Oil Company during 2008, 2009, and 2010 assuming both companies are SE companies.

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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

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