The Allen Oil Company incurred the following costs and had the other transactions shown below for the years 2005 and 2006. The company uses the successful efforts method of accounting.

2005

a. Paid \($100,000\) for G&G costs during the year.

b. Leased acreage in three individually significant areas as follows:

1) Adams lease—1,000 acres @ \($60\) per acre bonus, other acquisition costs, \($3,000.\)

2) Grove lease—800 acres @ a lease bonus of \($70\) per acre, and other acquisition costs of \($10,000\) 

3) Borden lease—600 acres @ \($60\) per acre bonus and other acquisition costs of \($8,000.\)

c. The company also leased 20 individual tracts for a total cost of \($80,000.\) These leases are considered to be individually insignificant and are the first insignificant unproved properties acquired by Allen.

d. Paid \($5,000\) in costs to maintain lease and land records in 2005. Also, paid \($30,000\) to successfully defend a title suit concerning the Grove lease.

e. Paid the following costs in connection with Grove #1:

f. An exploratory well was drilled on the Borden lease in 2005 on a turnkey basis to 8,000 feet. The contractor’s charge was paid for \($400,000,\) which included \($60,000\) for casing. At the end of 2005, a decision had not been made to complete or abandon the well. No major capital expenditure was required. At the end of 2005, the Adams lease was impaired 60% and the Borden lease by 30%. The company’s policy is to maintain an allowance for impairment at 70% of the cost of insignificant leases.

2006

a. Delay rentals of \($2,000\) were paid on the Adams lease, \($1,200\) on the Borden lease, and \($3,000\) on insignificant leases.

b. During 2006, the Adams lease was abandoned and three of the individually insignificant leases (cost \($8,000)\) were also abandoned. The Borden lease is now considered to be a very valuable lease because a large producer was discovered on adjoining land.

c. At year-end (2006), the company had not made a decision to complete or abandon the Borden well.

REQUIRED: 

Prepare journal entries for the above transactions.

Transcribed Image Text:

G&G costs to locate a wellsite Location and road preparation prior to spudding-in the well Surface damages... Surface casing Contractor's fee/daywork rate $ 3,000 8,000 15,000 7,000 175,000