Successful Efforts versus Full Cost Method

Barrett Oil and Gas Company was about to embark on a 50-well exploration program in Texas and Louisiana on January 1, 2011. The CEO estimated that the average cost to drill a well would run $800,000 per well, with a resulting success ratio of 60 percent (30 wells were expected to yield commercially viable quantities of oil while 20 wells were expected to be commercially unproductive).

In aggregate, the CEO estimated that the 30 successful wells would yield 10 million barrels of oil, to be extracted at the following rates.

		Estimated Per Barrel
Year	Production (in barrels)	Selling Price	Lifting Cost
2011	1,000,000	$30	$5
2012	1,500,000	30	5
2013	1,500,000	35	6
2014	2,500,000	40	7
2015	3,500,000	45	8
	10,000,000

The CEO of Barrett Oil and Gas Company was concerned about how the accounting for the exploration project would affect the firms overall reported results.

The exploration program would be financed with a $40 million bank loan on January 1, 2011, at an interest rate of 10 percent per year on the balance of the loan outstanding as of the beginning of the year.

The loan would be repaid in 4 installments of $10 million per year, with the first payment occurring on December 31, 2012.

Required

Assume that this is the companys only exploration project. Prepare the firms income statements and balance sheets for 2011 through 2015 assuming the use of:

1. The full cost method. Round answers to nearest one decimal place. Enter all values as positive numbers.

Income Statement (in millions)
	2011	2012	2013	2014	2015		Total
Revenues	$	$	$	$	$		$
Less:
Lifting costs
Exploration costs
Interest expense
Depletion expense
Income before tax

Balance Sheet (in millions)
		2011	2012	2013	2014	2015
Assets
Cash
Oil reserves
Less:
Accumulated depletion
Total
Liabilities & Shareholders Equity
Bank loan
Retained earnings
Total

2. The successful efforts method. Round answers to nearest one decimal place. Enter all values as positive numbers.

Income Statement (in millions)
	2011	2012	2013	2014	2015	Total
Revenues		$	$	$	$	$
Less:
Lifting costs
Exploration costs
Interest expense
Depletion expense
Income before tax

Balance Sheet (in millions)
		2011	2012	2013	2014	2015
Assets
Cash
Oil reserves
Less:
Accumulated depletion
Total		$	$	$	$	$
Liabilities & Shareholders Equity
Bank loan		$	$	$	$	$
Retained earnings
Total		$	$	$	$	$