Consider the oil and gas exploration companies Wild Cat and Crazy Dog, which have identical histories. Both have been in operation for two years, during which they have each explored five sites a year at a cost of $3 million per site. Only one of the sites each year has proven to be economically viable; the remaining sites were dry holes. The oil reserves in each successful well are estimated at 600,000 barrels, which will be extracted evenly over a six-year period commencing in the year of discovery.
Required:
a. Assuming that Wild Cat Company uses the full cost method of accounting for its exploration expenditures, calculate what it would report for the following:
i. The value of the oil wells asset on its statement of financial position at the end of each of the two years
ii. Depreciation expense on its statement of earnings for each of the two years
b. Assuming that Crazy Dog Company uses the successful efforts method of accounting for its exploration expenditures, calculate what it would report for the following:
i. The value of the oil wells asset on its statement of financial position at the end of each of the two years
ii. Depreciation expense on its statement of earnings for each of the two years
c. At the end of the two-year period, which company has the more valuable oil wells asset? Over the two-year period, which company has been more profitable?