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business
fundamental accounting
Questions and Answers of
Fundamental Accounting
Jackson Oil Company’s production for Lease A and Lease B is gathered into a common system and sold. Total sales for the month of July are 6,562 barrels.Assume the following data for Lease A and
Hill Company’s production from each well on Lease C and Lease D is estimated based on a 24-hour test. Oil produced from each well on each lease is commingled and measured before leaving each lease.
Longhorn Company (70% WI) and Aggie Company (30% WI) own a joint working interest in the Dowling Field. There is a 1/8 royalty owner. The 1/8 royalty is shared proportionally by Longhorn and Aggie.
Two leases in far West Texas are being combined to form the West End Unit.REQUIRED:a. Determine the participation factors for each party, assuming the participation factors are based on the acreage
Heagy Oil Company has production on a lease in Louisiana with the following ownership interest:During April, 5,000 (gross) barrels of oil (after correction for temperature, gravity, and BS&W)
Higgins Company, a full cost company located in Texas, sold 3,000 (gross) Mcf of gas with a heat content of 1.035 MMBtu/Mcf. The selling price of the gas was$9.00/MMBtu.REQUIRED:a. Determine the
Tharp Field is jointly owned by Gavin Company (70% WI), which acts as field operator, and Garza Company (30% WI). There is a 1/6 royalty. The 1/6 royalty is shared proportionally by Gavin and Garza.
Hays Oil Company is a new successful efforts company located in New Mexico.During September 2020, Hays Oil Company sold 2,000 Mcf of gas at 14.65 psia with a heat content of 1.030 MMBtu/Mcf at 14.73
Sam Field, located in northern Alaska, is jointly owned by Smith Company (60%WI) and Joyner Company (40% WI). Smith, which is the operator, estimates that gross gas production during July will be
____________ is natural gas that overlies and is in contact with crude oil in a reservoir but is not in solution with the oil.a. Nonassociated gasb. Associated gasc. Nondissolved gasd. Gas well gase.
__________________ involves buying or selling one shipment of oil under a price that is agreed upon at the time of the arrangement.a. Posted priceb. Spot pricec. Future priced. WTI pricee. None of
No royalty is typically paid on _______________.a. Lease use gasb. Off-lease use gasc. Crude oil exchangesd. Non-processed gase. None of these
Under the _______________ method of accounting for production imbalances, no receivable or payable is recorded for under-derlivered or overdelivered oil or gas.a. Entitlementsb. Salesc. Imbalancesd.
MMBTU is a measure of ____________.a. Volumeb. Energyc. Weightd. Gravitye. None of these
The price at ____________ is typically used as the price benchmark for spot trades of natural gas.a. WTIb. US Gulf Coastc. Rotterdam/Northwest Europed. Henry Hube. None of these
Define the following:a. IDCb. Elected capitalized IDCc. Subleased. Depletable basise. Half-year conventionf. Property
How does the formula for tax depletion differ from the formula for successful efforts or full cost depletion?
How does the tax depletion of leasehold costs differ from successful efforts or full cost depletion? Include in your answer a discussion of the reserves used (proved reserves or proved developed
How does amortization of lease and well equipment such as storage tanks and separators differ under the three methods? Include in your answer a discussion of the method used, including which reserves
Indicate which items are to be capitalized (C), expensed (E), or part capitalized and part expensed (C/E) for successful efforts, full cost, and tax accounting.Assume the maximum tax deductions are
How does amortization of drilling costs differ under the three methods? Include in your answer a discussion of the method used, which reserves are used, if any, and which drilling costs are
Belmont Oil Company, a full cost company, incurred intangible costs during 20XA related to the following:REQUIRED:a. Assuming Belmont is an independent producer, how much IDC can it deduct for
During early 20XA, Terry Petroleum incurred G&G costs of $45,000 for Project Area
As a result of the G&G, three areas of interest were identified. Detailed G&G was conducted on the areas of interest at the following costs:As a result of the detailed G&G studies, the
On January 1, 20XA, Granger Oil Corporation bought a developed lease for$300,000. During 20XA, Granger Oil Corporation incurred $600,000 of IDC on a successful well. Reserves of 400,000 barrels were
Hoffman Oil Corporation paid the following amounts in 20XD:REQUIRED: Determine the tax basis of any assets and the amount of any tax deductions. Shut-in royalty payments (not recoverable) $5,000
During 20XA, Black Petroleum incurred G&G costs of $20,000 for Project Area15. Two areas of interest were identified. Detailed seismic studies were conducted on the areas of interests at the
On March 1, 20XA, Bryce Mott purchases mineral rights (MR) for $80,000. On June 1, 20XA, he leases the mineral rights to Hampton Oil Company, retaining a 1/8 royalty interest (RI). Hampton Oil
Aztec Oil Company, an integrated producer, has an unproved property with acquisition and capitalized G&G costs of $35,000. Aztec also has a proved property with the following costs:REQUIRED:
Scott Oil Company, an independent producer, has the following account balances at 1/1/20XA:REQUIRED: Determine the amount of the tax loss on the following dates:a. On March 1, 20XA, the unproved
Thomas Petroleum has the following information:The lease is subleased to Stevenson Oil Corporation for $300,000, and Thomas retains an 1/16 ORI. At the date of the sublease, the FMV of the equipment
Graham Oil Corporation, an integrated producer, incurs IDC costs in the following years as indicated. The IDC amounts marked with an asterisk (*) relate to dry-hole IDC.REQUIRED: Compute the amount
During 20XB, Chatham Oil and Gas Company incurs the following costs relating to Lease A, a producing property:REQUIRED: Determine the tax basis of any assets and the amount of any tax deductions.
Colley Energy, an independent producer, has average production from Lease A of 100 bbl/day in 20XA from Lease A. The average selling price of oil in 20XA is$120/bbl. Net income from Lease A in 20XA
Laredo Oil Corporation began operations in June 20XA. Laredo Oil is classified as an independent producer. During the first 2½ years of operation, Laredo Oil acquired only two US properties, which
Kilpatrick Oil Corporation owns and operates four oil and gas properties that are classified for tax purposes as four separate properties. Data for the four properties are presented below:REQUIRED:
Lexington Energy owns only one lease in the United States, Lease Q. The following information for Lease Q, which is burdened with a 1/6 royalty, is as of 12/31/20XD.All reserve, production, and sales
If interest areas warranting further evaluation are identified, the initial reconnaissance costs of the project area are ______________.a. Capitalized to the areas of interestb. Allocated to the
After an area of interest is identified, any costs incurred to further evaluate it are__________.a. Capitalized to the area of interestb. Allocated to the areas of interest on an acre-by-acre basisc.
All of the following costs would be classified as IDC EXCEPT __________.a. Labor to install valves and pipe in the tank batteryb. Labor to install the wellheadc. Labor to cement surface casingd.
All of the following cost would be classified as lease and well equipment EXCEPT _________.a. Dirt-moving necessary for location of a tank batteryb. Reentering a producing well for the purpose of
According to the IRS, what reserves are to be used in computing cost depletion?a. Proved onlyb. Probable onlyc. Possible or perspective onlyd. All of thesee. None of these
What is the term describing two tracts of land that share only a corner?a. Adjacentb. Contiguousc. Annexedd. Indexede. None of these
Which of the following statements is NOT true regarding the election to expense IDC?a. Integrated oil companies are required to capitalize70% of IDC even after making the election.b. The amount
For a lessee, losses from unproductive properties may NOT be taken in which of the following situations?a. Losses are not taken for drilling development dry holes.b. Losses are not taken for
Generally, percentage depletion is allowed for ___________.a. Royalty ownersb. Integrated producersc. Independent producersd. All of thesee. None of these
List and briefly discuss the main points of the COPAS accounting procedures.
When two or more parties own a joint working interest, who will usually manage the property?
When do parties normally enter into an operating agreement?
What are the duties of the operator? What are the duties of the nonoperator?
What is a carried working interest? What is payout?
What is the difference between a direct cost and overhead?
What is combined fixed rate overhead?
The Fisher Lease is a joint working interest. Garcia Energy owns 70%, Cameron Company owns 20%, and Tampa Oil Company owns 10% of the working interest.Assume Garcia Energy is the operator and incurs
Harper Oil Corporation is the operator on the Farrow Lease. The accounting procedure attached to the JOA allows Harper to recoup its overhead by the use of a combined fixed rate—well basis of
Blowout Oil Corporation, a successful efforts company, transferred an item of equipment from its wholly owned warehouse to a jointly owned lease in which it has a 60% WI. The item of equipment is in
Burnout Oil Corporation has been in operation for 10 years. Burnout, the operator of Lease A, purchased casing with a list price of $60,000 for a joint interest property in which it has a 40% WI. The
Property #500 is a joint working interest property. Spinnaker Petroleum owns 60%, Hatch Corporation owns 30%, and Earth Company owns 10% of the working interest. Alec Petroleum is the operator and
Cornell Oil Company is the operator of Lease A and Lease B and has a 60% WI in each lease. A piece of equipment that originally cost $50,000 is transferred from Lease A to Lease B. The current market
Xtreme Petroleum owns equipment that originally cost $50,000. The equipment is currently being used on Lease A. Xtreme Petroleum owns a 60% working interest in Lease A and serves as the operator of
The Choice Lease has the following working interest owners: Martin Oil Company 50%, League Energy 25%, and Jackson Oil Company 25%. There is a 1/8 royalty on the lease. On April 1, 2021, Martin Oil
Wildcat Gas Company owns a 33.3% working interest in a lease in West Texas.Cecil Jones, a local farmer, owns a 1/8 royalty interest in the lease. Wildcat is the operator, and its partners, Rocky
Force Petroleum owns equipment that originally cost $80,000. The equipment is currently being used on the Williams Lease. Force Petroleum owns a 40%working interest in the Williams Lease and serves
The Todd Lease is operated by Tyler Corporation. The foreman of the Todd Lease must make a decision regarding the replacement of a pumping unit on the lease.The foreman has identified three possible
Discuss penalty/premium provisions typically related to non-consent operations.Be sure to comment on why some penalties are higher/lower than others.
Joint operations typically take what legal form?a. Jointly owned corporationb. Legal partnershipc. Undivided interestd. Sole proprietorshipe. None of these
Generally, if there is a conflict between the accounting procedure and the operating agreement ____________________.a. The language in the accounting procedure prevails.b. The language in the
What is the length of time in which a nonoperator typically has to raise questions regarding a charge that appeared on a joint interest billing?a. Twenty-four months from when the operator billed the
When are joint interest billings considered to be true and correct?a. After the charges have been auditedb. After the end of the adjustment periodc. When paid by the nonoperatorsd. After seven
Who pays for the cost of joint interest audits?a. The nonoperator who requested the audit pays for the audit.b. All of the parties share the cost in proportion to their working interest.c. All of the
When used material in condition B is transferred to or from a joint property, typically _______________.a. It is priced at 75% of the current new price.b. It is priced at 75% of the price paid when
What is the most commonly used method of computing overhead in domestic production and drilling operations?a. Only actual indirect costs may be charged.b. The percentage basis where overhead is
______________ arise when one or more of the working interest owners do not consent to the drilling, deepening, reworking, or abandonment of a well.a. Nonconsent operationsb. Sole risk operationsc.
The term “joint account” refers to ______________.a. The joint bank account set up by the joint ventureb. All of the costs that are associated with a specific joint operationc. All of the bank
What is the difference between a direct cost and an indirect cost?a. They are the same thing.b. Direct costs are costs that are billed to the nonoperators on a dollar-per-dollar basis, while indirect
What is the major purpose of unitization?
Distinguish between a carried interest situation, a free-well transaction, and a farm-in/farm-out transaction.
Identify the types of interests that are created in the following situations. If the interest is an overriding royalty or a production payment interest, also state whether it is a retained or
The following transactions occurred during 2020:a. Axis Oil Company and Alan Oil Company jointly purchased a 1,500-acre lease in Oklahoma for $48,000. Axis has a 55% WI and Alan has a 45% WI.Axis
Ellis, Terry, and Franks signed a lease agreement with Farmer Brown, the owner of the mineral rights. Farmer Brown received a 1/5 royalty interest. The companies’working interests are 60%, 30%, and
Unlikely Oil Company owns the working interest in a small lease in Louisiana that has a 1/5 royalty interest. The royalty interest owner is Mr. O’Neal. Unlikely also owns the working interest in
Libby Oil Company owns 100% of the working interest in a lease that has a 20%royalty interest. The royalty interest owner is Mr. Heagy. Needing additional funds to develop the property, Libby sold
Upbeat Oil Company acquired an undeveloped lease for which it paid $30,000.The lease is burdened with a 1/8 royalty. Financially unable to develop the lease, Upbeat sold 60% of its working interest
Lomas Company owns 100% of the working interest in an unproved property with a 1/5 royalty interest. Lomas conveys 40% of the working interest in the property to Mason Company in return for Mason
Hays Company (a successful efforts company) owns 100% WI in a lease that is burdened with a 1/8 royalty interest owned by Alfred Smith. The undeveloped lease has capitalized costs of $40,000 and an
JD Company owns a 100% WI in a proved property with net capitalized costs of $200,000. JD Company sold the lease for $350,000 cash and a production payment of $160,000, plus interest of 8% to be paid
Zeke Company owns a proved property with the following costs:(separate amortization base)Zeke Company sells 100% of the working interest in the property to Torrance Company for $700,000.REQUIRED:a.
Alred Oil Company leased unexplored acreage from Ethan Jones for $30,000, with Jones receiving a 1/8 royalty interest. Financially unable to develop the lease, Alred enters into a farm-in/farm-out
Bore Oil Company owns 100% of the working interest in a fully developed lease burdened with a 1/8 royalty interest. The lease has the following capitalized costs and reserves data as of January 1,
Rain Company owns 100% of the working interest in a fully developed lease on which there is a 1/8 royalty interest. The lease has the following capitalized costs and reserve data as of January 1,
In 2018, Port Company purchased the working interest of an unproved lease for$100,000. In 2019, Port Company recognized impairment of $20,000 on this lease.In 2020, Port Company sold the entire
Lexington Company sold 50% of the working interest in a proved lease to Cantu Company for $500,000. Lexington Company’s net cost basis in this proved property was $300,000. Lexington Company uses
Four companies own adjacent leases that share a common reservoir. The companies each have a 100% working interest in their respective leases in which they have the following investment:The companies
Zinc Company acquired 100% of the working interest in an unproved property at a cost of $100,000. Zinc later sold the working interest, retaining an overriding royalty interest (ORI).REQUIRED: Give
Frontier Company, a successful efforts company, has a 1/6 royalty interest in an unproved property. Assume that Frontier Company’s net capitalized cost in the property is $200,000.REQUIRED: Give
Launch Oil Company, a successful efforts company, owns 100% of the working interest in a 320-acre proved property with the following net unamortized costs:Launch Oil Company sells 100% of the working
Greene Company sold its 100% WI in a proved property for $700,000 and retained an ORI. Greene’s net cost basis in the property was $450,000. The fair market value of the entire original working
Universal Company owns a 100% WI in an unproved property for which it paid$80,000. The property has a 1/8 royalty interest. Universal Company agrees to farm out the working interest to Gene Company
George Company signed a lease agreement with Donald Hill covering 900 acres in Oklahoma. Mr. Hill received a bonus of $50,000 and a 1/5 royalty interest, and George Company received 100% of the
Harper Oil Company, a successful efforts company, has an undeveloped lease for which it paid $180,000. The property was individually significant, and individual impairment of $50,000 had been
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