Mainstay Pipeline Company operates a pipeline that provides natural gas to several East Coast cities. Mainstay's balance sheet includes the asset Oil Properties.
Mainstay paid $5 million cash for petroleum reserves that contained an estimated 500,000 barrels of oil. The company paid $350,000 for additional geologic tests of the property and $110,000 to prepare the surface for drilling. Prior to production, the company signed a $40,000 note payable to have a building constructed on the property. Because the building provides on-site headquarters for the drilling effort and will be abandoned when the oil is depleted, its cost is debited to the Oil Properties account and included in depletion charges. During the first year of production, Mainstay removed 80,000 barrels of oil, which it sold on credit for $38 per barrel. Operating expenses related to this project totaled $660,000 for the first year, all paid in cash. In addition, Mainstay accrued income tax at the rate of 40%
Required
1. Record all of Mainstay's transactions for the year.
2. Prepare the company's income statement for this oil and gas project for the first year. Evaluate the profitability of the project.