The following RRA information is taken from the December 31, 2015, annual report of FX Energy, Inc.

Question:

FX Energy, Inc. Changes in the Standardized Measure of Discounted Future Cash Flows Year Ended December 31, 2015

($ thousands)

Present value at January 1, 2015 ...............$ 5,460

Sales of oil produced, net of production costs........... (1,172)

Net changes in prices and production costs........... (159)

Extensions and discoveries, net of future costs........... 2,511

Changes in estimated future development costs........... (53)

Revisions in previous quantity estimates........... (31)

Accretion of discount ...................... 546

Changes in rates of production and other............ 116

Present value at December 31, 2011 ...............$ 7,218

Required

a. Prepare an RRA income statement for FX Energy for 2015.

b. FX Energy reports elsewhere in its annual report an ( historical cost- based) operating loss from exploration and production for 2015 of $ 5,245. While this amount may exclude certain administrative cost allocations, take this operating loss as a reasonable historical cost- based analogue of the RRA income you calculated in part a. Explain why RRA income for 2015 is different from the $ 5,245 loss under historical cost.

c. The standardized measure is applied only to proved reserves under RRA, using average oil and gas prices for the year. Explain why.

d. RRA mandates a discount rate of 10% for the RRA present value calculations, rather than allowing each firm to choose its own rate. Why? Can you see any disadvantages to mandating a common discount rate?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...