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 agreement with Jayhawk Company. Jayhawk agrees to drill and complete a well in return for 60% of the working interest and the right to recover all of its costs. Jayhawk drills and completes the well for $100,000.

Estimated proved reserves are 125,000 barrels, and proved developed reserves are 25,000 barrels. Jayhawk is the operator, and production totals 1,000 bbl/month for the first six months. Assume that the average selling price is $80/bbl, and lifting costs average $20/bbl. Ignore severance taxes and assume reserve estimates do not change. Jayhawk assumes the responsibility of paying the royalty interest.

REQUIRED:

a. Calculate payout.

b. Assuming that both companies are successful efforts companies, give all of the entries (including monthly DD&A expense for the first three months)
that would be made by Alred Oil Company and by Jayhawk Company.