Lil Oil Company, a successful efforts company, has a WI in Lease X with the following costs and reserves as of January 1, 20X1.

Proved PropertyIDC & LWE

Asset$100,000$500,000

Accumulated DD&A  (40,000)(200,000)    

Net Carrying Value$60,000$300,000    

Estimated proved reserves 1/1/20X1220,000 bbls

Estimated proved developed reserves 1/1/20X1140,000 bbls

No additional drilling occurred during the year.

(a)During the first quarter of 20X1, production was 20,000 bbls. Compute DD&A expense for the first quarter of 20X1.

(b)On June 30, 20X1, a new reserve report estimated the following reserves as of June 30, 20X1

Proved reserves250,000 bbls

Proved developed reserves150,000 bbls

Production for the second quarter of 20X1 was 25,000 bbls. Compute DD&A expense for the second quarter of 20X1 assuming that Lil Oil Company uses the new reserve report to compute DD&A expense for the entire second quarter.

(c)Under the Entire Quarter Method of calculating DD&A in a quarter with a reserve revision,discuss the impact to net income in a year with an upward revision in the reserves estimate, and (2) discuss the impact of a net income in future years assuming no additional revisions.