Exploratory Company is an oil and gas exploration firm. During 2011, Exploratory engaged in 86 different exploratory projects, only 20 of which were successful. The total cost of this exploration effort was $24 million, $5.6 million of which was associated with the successful projects. As of the end of 2011, production had not yet begun at the successful sites.
1. Using the successful efforts method of accounting for oil and gas exploration costs, how much exploration expense would be shown in Exploratory’s income statement for 2011? How much of the exploration cost will be capitalized and shown as an asset on the company’s balance sheet as of December 31, 2011?
2. Repeat (1) using the full cost method.