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FuturePetro Corp. owned the following unproved property as of the end of 1986. Significant Leases Insignificant Leases Lease S $510,000 Lease T $85,000 Lease U

FuturePetro Corp. owned the following unproved property as of the end of 1986.

Significant Leases


Insignificant Leases


Lease S

$510,000

Lease T

$85,000

Lease U

$320,000

Lease V

$50,000

Total

$830,000

Lease W

$45,000



Lease X

$40,000



Total

$220,000

Although no activity took place on Lease S during the year, FuturePetro decided that Lease S was not impaired because there were still three years left in that lease’s primary term. Two dry holes were drilled on Lease U during the year; but because FuturePetro intended to drill one more well on Lease U in the coming year, it decided that Lease U was only 55% 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. FuturePetro’s policy is to provide at year-end an allowance equal to 65% of the gross cost of these properties. The allowance account had a balance of $24,000 at year end. Give the entries to record impairment, prepare the adjusted trial balance, and calculate the deferred tax liability.

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