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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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