Question
EcoPower Holdings owned the following unproved property as of the end of 1985. Significant Leases Insignificant Leases Lease G $530,000 Lease H $90,000 Lease I
EcoPower Holdings owned the following unproved property as of the end of 1985.
Significant Leases | Insignificant Leases | ||
Lease G | $530,000 | Lease H | $90,000 |
Lease I | $350,000 | Lease J | $50,000 |
Total | $880,000 | Lease K | $45,000 |
Lease L | $40,000 | ||
Total | $225,000 |
Although no activity took place on Lease G during the year, EcoPower decided that Lease G was not impaired because there were still four years left in that lease’s primary term. One dry hole was drilled on Lease I during the year; but because EcoPower intended to drill one more well on Lease I in the coming year, it decided that Lease I was only 50% impaired. With respect to the insignificant leases, past experience indicates that 70% of all unproved properties assessed on a group basis will eventually be abandoned. EcoPower’s policy is to provide at year-end an allowance equal to 75% of the gross cost of these properties. The allowance account had a balance of $28,000 at year end. Give the entries to record impairment, prepare the income statement and balance sheet, and calculate the current tax expense.
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