Question
PrimePetro Holdings owned the following unproved property as of the end of 1996. Significant Leases Insignificant Leases Lease P $510,000 Lease Q $70,000 Lease R
PrimePetro Holdings owned the following unproved property as of the end of 1996.
Significant Leases | Insignificant Leases | ||
Lease P | $510,000 | Lease Q | $70,000 |
Lease R | $320,000 | Lease S | $45,000 |
Total | $830,000 | Lease T | $30,000 |
Lease U | $25,000 | ||
Total | $170,000 |
Although no activity took place on Lease P during the year, PrimePetro decided that Lease P was not impaired because there were still four years left in that lease’s primary term. Two dry holes were drilled on Lease R during the year; but because PrimePetro intended to drill one more well on Lease R in the coming year, it decided that Lease R 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. PrimePetro’s policy is to provide at year-end an allowance equal to 72% of the gross cost of these properties. The allowance account had a balance of $27,000 at year end. Give the entries to record impairment, prepare the income statement and balance sheet, and calculate the deferred tax liability.
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