Question
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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