ABC Company has 49% of the WI in a proved property in Norway. Delphi Petroleum Company owns 51% of the WI. In order to produce oil from the reservoir, a platform and production facilities must be constructed at an estimated cost of $3 billion. Delphi Petroleum Company has its cash tied up in other ventures and does not have sufficient capital to fund its share of the cost of the project. The companies reach an agreement whereby ABC agrees to pay 100% of the cost of the construction, and later as production occurs, ABC will keep 100% of the production until it has recouped the costs that it paid on Delphi Petroleum Company’s behalf plus interest. How would ABC account for this arrangement? (Ignore royalties.)

a. Capitalize 100% of the cost of construction of the platform and facilities and set up a receivable from Delphi Petroleum Company for 51% of the cost of the construction. As production occurs, ABC would recognize revenue equal to 100% of production until payout occurs, after which time Delphi Petroleum Company would recognize 51% of the revenues.

b. Capitalize 100% of the cost of construction of the platform and facilities.

As production occurs, ABC would recognize revenue equal to 100% of production until payout occurs, after which time Delphi Petroleum Company would recognize 51% of the revenues.

c. Capitalize 49% of the cost of construction of the platform and facilities.

As production occurs, ABC would recognize revenue equal to 100% of production until payout occurs, after which time Delphi Petroleum Company would recognize 51% of the revenues.

d. Capitalize 49% of the cost of construction of the platform and facilities as an asset and set up a receivable from Delphi Petroleum Company.

As production occurs, ABC would recognize revenue equal to 49% of production and Delphi Petroleum Company would recognize 51%.

e. None of these applies.