Question 2 (Q2)

Lucky Oil Company began operations on March 3, 2022, with the acquisition of a lease in Texas. During the first year, the following costs were incurred, DD&A (depreciation, depletion, and amortization) taken, and the following revenue was earned.

• G&G costs . . . . . . . . . . . . . . . . . . . $ 90000
• Acquisition costs . . . . . . . . . . . . . . . 140000
• Exploratory dry holes . . . . . . . . . . . . 1300000
• Exploratory wells, successful . . . . . . . 900000
• Development costs . . . . . . . . . . . . . . 330000
• Production costs . . . . . . . . . . . . . . . 53000
• DD&A expense . . . . . . . . . . . . . . . . 53000 (SE) 140000 (FC)
• Revenue . . . . . . . . . . . . . . . . . . . . . 1,370,000

Required:

1. Prepare the income statement for Lucky oil company in two accounting method, successful efforts method and full cost method? (4 marks)

Question 3:

Assume that a petroleum company spends $4.5 million on exploration in each of five drilling sites during 2021 and that the company discovers oil only on three of the sites. The other two sites are dry holes (unsuccessful projects). The three productive sites are expected to produce 40 million barrel of oils, 4 million of which are produced and sold for $60 each during 2021. It is also assumed that there are no taxes and other expenses.

Required:

1. Prepare the income statement for Lucky oil company in, successful efforts method? (3 marks)

According to the oil and gas industry's successful attempts technique, exploration expenditures for failing projects (dry holes) are immediately expensed, whereas exploration costs for successful ventures are capitalized.