Questions and Answers of Fundamental Accounting

Mr. Stephens sold the surface rights and retained the mineral rights in some land in Texas. He leases the land to George Oil Company, reserving a 1/5 royalty.During 2019, George Oil Company makes the
Mountain Oil Company owns a 100% WI in a lease in Wyoming. The lease is burdened with a 1/5 royalty. During the month of July, a total of 10,000 barrels of oil was produced and sold. Assume the
During July, Session Oil Company sold 6,000 Mcf of gas at $10.00/Mcf. The lease provides a 1/6 RI. The working interest owner receives 100% of the revenues (net of 5% severance tax) and then
McGavin Oil Company obtained 200 Mcf of gas from Lease A and used the gas for gas injection on Lease B. The gas was valued at $12/Mcf. Assume production taxes are 5% and the royalty on Lease A is a
Wildcat Oil Company sold or used the gas produced on Lease A during March as follows:a. 600 Mcf used as fuel to operate lease equipmentb. 800 Mcf sold to R Company at $12/Mcf Assume a 1/7 RI and a
Libby Oil Company has a working interest in a remote lease located in Wyoming.Libby agreed to pay the royalty owner a minimum royalty of $500/month in addition to the 1/5 royalty. Gas production on
Complete the accompanying run ticket and give the entry to record the sale of the oil at $75/bbl assuming a severance tax rate of 5% and a 1/5 RI. The operator is Montgomery Oil Company and the run
Information from a run ticket shows that 2,000 net barrels of oil with an API gravity of 36º were sold. The selling price is based on a contract price of $90/bbl, adjusted downward 4¢ for each
Structure Oil Company made the following transactions in 2021:a. During the months of January through March, minimum royalty payments of$500/month were paid. The minimum royalty payments are
Garcia Company has a 100% WI in a lease in a remote area of Wyoming. The lease provides for a 1/5 royalty. Garcia produces and sells a total of 150,000 Mcf of gas from the property during August. Of
Determine the barrels of production allocated to each well given the following data:Round the ratio to three decimal places and round barrels to the nearest whole barrel. Well 24-hr Test, bbl 40 50
Bryant Oil Company produced a total of 1,000 barrels of oil in June 2022. The expected selling price was $120/bbl. The purchaser pays the severance taxes and the royalty interest owner and remits the
Launch Oil Company owns a working interest in the Carpenter Lease in Texas.The lease is burdened with a 3/16 royalty interest. During April, a total of 4,000 barrels of oil is sold at $90/bbl to a
Michael Oil Company operates Leases X and Y. Michael Oil transfers 60 barrels of oil from Lease X to Lease Y to be used as fuel on Lease Y. The current spot oil price is $110/bbl, and the severance
A lease operated by Rocky Oil Company produces a total of 3,000 barrels of oil in June. The oil is sold in October. The posted field price and the actual selling price is $100/bbl. The severance tax
Pam O’Neal owns some mineral rights in Oklahoma that she leases to Sunshine Oil Company, reserving a 1/8 royalty interest. During 2021, Sunshine Oil made the following assignments:a. To Ted Mair,
Kincaid Oil Company sells 20,000 (gross) Mcf of gas at $9/Mcf. The lease is burdened with a 1/6 RI, and the working interest owner has assigned an ORI of 1/10. The severance tax rate is 7%.REQUIRED:
Jackson Oil Company’s production for Lease A and Lease B is gathered into a common system and sold. Total sales for the month of July are 6,562 barrels.Assume the following data for Lease A and
Hill Company’s production from each well on Lease C and Lease D is estimated based on a 24-hour test. Oil produced from each well on each lease is commingled and measured before leaving each lease.
Longhorn Company (70% WI) and Aggie Company (30% WI) own a joint working interest in the Dowling Field. There is a 1/8 royalty owner. The 1/8 royalty is shared proportionally by Longhorn and Aggie.
Two leases in far West Texas are being combined to form the West End Unit.REQUIRED:a. Determine the participation factors for each party, assuming the participation factors are based on the acreage
Heagy Oil Company has production on a lease in Louisiana with the following ownership interest:During April, 5,000 (gross) barrels of oil (after correction for temperature, gravity, and BS&W)
Higgins Company, a full cost company located in Texas, sold 3,000 (gross) Mcf of gas with a heat content of 1.035 MMBtu/Mcf. The selling price of the gas was$9.00/MMBtu.REQUIRED:a. Determine the
Tharp Field is jointly owned by Gavin Company (70% WI), which acts as field operator, and Garza Company (30% WI). There is a 1/6 royalty. The 1/6 royalty is shared proportionally by Gavin and Garza.
Hays Oil Company is a new successful efforts company located in New Mexico.During September 2020, Hays Oil Company sold 2,000 Mcf of gas at 14.65 psia with a heat content of 1.030 MMBtu/Mcf at 14.73
Sam Field, located in northern Alaska, is jointly owned by Smith Company (60%WI) and Joyner Company (40% WI). Smith, which is the operator, estimates that gross gas production during July will be
____________ is natural gas that overlies and is in contact with crude oil in a reservoir but is not in solution with the oil.a. Nonassociated gasb. Associated gasc. Nondissolved gasd. Gas well gase.
__________________ involves buying or selling one shipment of oil under a price that is agreed upon at the time of the arrangement.a. Posted priceb. Spot pricec. Future priced. WTI pricee. None of
No royalty is typically paid on _______________.a. Lease use gasb. Off-lease use gasc. Crude oil exchangesd. Non-processed gase. None of these
Under the _______________ method of accounting for production imbalances, no receivable or payable is recorded for under-derlivered or overdelivered oil or gas.a. Entitlementsb. Salesc. Imbalancesd.
MMBTU is a measure of ____________.a. Volumeb. Energyc. Weightd. Gravitye. None of these
The price at ____________ is typically used as the price benchmark for spot trades of natural gas.a. WTIb. US Gulf Coastc. Rotterdam/Northwest Europed. Henry Hube. None of these
Define the following:a. IDCb. Elected capitalized IDCc. Subleased. Depletable basise. Half-year conventionf. Property
How does the formula for tax depletion differ from the formula for successful efforts or full cost depletion?
How does the tax depletion of leasehold costs differ from successful efforts or full cost depletion? Include in your answer a discussion of the reserves used (proved reserves or proved developed
How does amortization of lease and well equipment such as storage tanks and separators differ under the three methods? Include in your answer a discussion of the method used, including which reserves
Indicate which items are to be capitalized (C), expensed (E), or part capitalized and part expensed (C/E) for successful efforts, full cost, and tax accounting.Assume the maximum tax deductions are
How does amortization of drilling costs differ under the three methods? Include in your answer a discussion of the method used, which reserves are used, if any, and which drilling costs are
Belmont Oil Company, a full cost company, incurred intangible costs during 20XA related to the following:REQUIRED:a. Assuming Belmont is an independent producer, how much IDC can it deduct for
During early 20XA, Terry Petroleum incurred G&G costs of $45,000 for Project Area
As a result of the G&G, three areas of interest were identified. Detailed G&G was conducted on the areas of interest at the following costs:As a result of the detailed G&G studies, the
On January 1, 20XA, Granger Oil Corporation bought a developed lease for$300,000. During 20XA, Granger Oil Corporation incurred $600,000 of IDC on a successful well. Reserves of 400,000 barrels were
Hoffman Oil Corporation paid the following amounts in 20XD:REQUIRED: Determine the tax basis of any assets and the amount of any tax deductions. Shut-in royalty payments (not recoverable) $5,000
During 20XA, Black Petroleum incurred G&G costs of $20,000 for Project Area15. Two areas of interest were identified. Detailed seismic studies were conducted on the areas of interests at the
On March 1, 20XA, Bryce Mott purchases mineral rights (MR) for $80,000. On June 1, 20XA, he leases the mineral rights to Hampton Oil Company, retaining a 1/8 royalty interest (RI). Hampton Oil
Aztec Oil Company, an integrated producer, has an unproved property with acquisition and capitalized G&G costs of $35,000. Aztec also has a proved property with the following costs:REQUIRED:
Scott Oil Company, an independent producer, has the following account balances at 1/1/20XA:REQUIRED: Determine the amount of the tax loss on the following dates:a. On March 1, 20XA, the unproved
Thomas Petroleum has the following information:The lease is subleased to Stevenson Oil Corporation for $300,000, and Thomas retains an 1/16 ORI. At the date of the sublease, the FMV of the equipment
Graham Oil Corporation, an integrated producer, incurs IDC costs in the following years as indicated. The IDC amounts marked with an asterisk (*) relate to dry-hole IDC.REQUIRED: Compute the amount
During 20XB, Chatham Oil and Gas Company incurs the following costs relating to Lease A, a producing property:REQUIRED: Determine the tax basis of any assets and the amount of any tax deductions.
Colley Energy, an independent producer, has average production from Lease A of 100 bbl/day in 20XA from Lease A. The average selling price of oil in 20XA is$120/bbl. Net income from Lease A in 20XA
Laredo Oil Corporation began operations in June 20XA. Laredo Oil is classified as an independent producer. During the first 2½ years of operation, Laredo Oil acquired only two US properties, which
Kilpatrick Oil Corporation owns and operates four oil and gas properties that are classified for tax purposes as four separate properties. Data for the four properties are presented below:REQUIRED:
Lexington Energy owns only one lease in the United States, Lease Q. The following information for Lease Q, which is burdened with a 1/6 royalty, is as of 12/31/20XD.All reserve, production, and sales
If interest areas warranting further evaluation are identified, the initial reconnaissance costs of the project area are ______________.a. Capitalized to the areas of interestb. Allocated to the
After an area of interest is identified, any costs incurred to further evaluate it are__________.a. Capitalized to the area of interestb. Allocated to the areas of interest on an acre-by-acre basisc.
All of the following costs would be classified as IDC EXCEPT __________.a. Labor to install valves and pipe in the tank batteryb. Labor to install the wellheadc. Labor to cement surface casingd.
All of the following cost would be classified as lease and well equipment EXCEPT _________.a. Dirt-moving necessary for location of a tank batteryb. Reentering a producing well for the purpose of
According to the IRS, what reserves are to be used in computing cost depletion?a. Proved onlyb. Probable onlyc. Possible or perspective onlyd. All of thesee. None of these
What is the term describing two tracts of land that share only a corner?a. Adjacentb. Contiguousc. Annexedd. Indexede. None of these
Which of the following statements is NOT true regarding the election to expense IDC?a. Integrated oil companies are required to capitalize70% of IDC even after making the election.b. The amount
For a lessee, losses from unproductive properties may NOT be taken in which of the following situations?a. Losses are not taken for drilling development dry holes.b. Losses are not taken for
Generally, percentage depletion is allowed for ___________.a. Royalty ownersb. Integrated producersc. Independent producersd. All of thesee. None of these
List and briefly discuss the main points of the COPAS accounting procedures.
When two or more parties own a joint working interest, who will usually manage the property?
When do parties normally enter into an operating agreement?
What are the duties of the operator? What are the duties of the nonoperator?
What is a carried working interest? What is payout?
What is the difference between a direct cost and overhead?
What is combined fixed rate overhead?
The Fisher Lease is a joint working interest. Garcia Energy owns 70%, Cameron Company owns 20%, and Tampa Oil Company owns 10% of the working interest.Assume Garcia Energy is the operator and incurs
Harper Oil Corporation is the operator on the Farrow Lease. The accounting procedure attached to the JOA allows Harper to recoup its overhead by the use of a combined fixed rate—well basis of
Blowout Oil Corporation, a successful efforts company, transferred an item of equipment from its wholly owned warehouse to a jointly owned lease in which it has a 60% WI. The item of equipment is in
Burnout Oil Corporation has been in operation for 10 years. Burnout, the operator of Lease A, purchased casing with a list price of $60,000 for a joint interest property in which it has a 40% WI. The
Property #500 is a joint working interest property. Spinnaker Petroleum owns 60%, Hatch Corporation owns 30%, and Earth Company owns 10% of the working interest. Alec Petroleum is the operator and
Cornell Oil Company is the operator of Lease A and Lease B and has a 60% WI in each lease. A piece of equipment that originally cost $50,000 is transferred from Lease A to Lease B. The current market
Xtreme Petroleum owns equipment that originally cost $50,000. The equipment is currently being used on Lease A. Xtreme Petroleum owns a 60% working interest in Lease A and serves as the operator of
The Choice Lease has the following working interest owners: Martin Oil Company 50%, League Energy 25%, and Jackson Oil Company 25%. There is a 1/8 royalty on the lease. On April 1, 2021, Martin Oil
Wildcat Gas Company owns a 33.3% working interest in a lease in West Texas.Cecil Jones, a local farmer, owns a 1/8 royalty interest in the lease. Wildcat is the operator, and its partners, Rocky
Force Petroleum owns equipment that originally cost $80,000. The equipment is currently being used on the Williams Lease. Force Petroleum owns a 40%working interest in the Williams Lease and serves
The Todd Lease is operated by Tyler Corporation. The foreman of the Todd Lease must make a decision regarding the replacement of a pumping unit on the lease.The foreman has identified three possible
Discuss penalty/premium provisions typically related to non-consent operations.Be sure to comment on why some penalties are higher/lower than others.
Joint operations typically take what legal form?a. Jointly owned corporationb. Legal partnershipc. Undivided interestd. Sole proprietorshipe. None of these
Generally, if there is a conflict between the accounting procedure and the operating agreement ____________________.a. The language in the accounting procedure prevails.b. The language in the
What is the length of time in which a nonoperator typically has to raise questions regarding a charge that appeared on a joint interest billing?a. Twenty-four months from when the operator billed the
When are joint interest billings considered to be true and correct?a. After the charges have been auditedb. After the end of the adjustment periodc. When paid by the nonoperatorsd. After seven
Who pays for the cost of joint interest audits?a. The nonoperator who requested the audit pays for the audit.b. All of the parties share the cost in proportion to their working interest.c. All of the
When used material in condition B is transferred to or from a joint property, typically _______________.a. It is priced at 75% of the current new price.b. It is priced at 75% of the price paid when
What is the most commonly used method of computing overhead in domestic production and drilling operations?a. Only actual indirect costs may be charged.b. The percentage basis where overhead is
______________ arise when one or more of the working interest owners do not consent to the drilling, deepening, reworking, or abandonment of a well.a. Nonconsent operationsb. Sole risk operationsc.
The term “joint account” refers to ______________.a. The joint bank account set up by the joint ventureb. All of the costs that are associated with a specific joint operationc. All of the bank
What is the difference between a direct cost and an indirect cost?a. They are the same thing.b. Direct costs are costs that are billed to the nonoperators on a dollar-per-dollar basis, while indirect
What is the major purpose of unitization?
Distinguish between a carried interest situation, a free-well transaction, and a farm-in/farm-out transaction.
Identify the types of interests that are created in the following situations. If the interest is an overriding royalty or a production payment interest, also state whether it is a retained or
The following transactions occurred during 2020:a. Axis Oil Company and Alan Oil Company jointly purchased a 1,500-acre lease in Oklahoma for $48,000. Axis has a 55% WI and Alan has a 45% WI.Axis
Ellis, Terry, and Franks signed a lease agreement with Farmer Brown, the owner of the mineral rights. Farmer Brown received a 1/5 royalty interest. The companies’working interests are 60%, 30%, and
Unlikely Oil Company owns the working interest in a small lease in Louisiana that has a 1/5 royalty interest. The royalty interest owner is Mr. O’Neal. Unlikely also owns the working interest in
Libby Oil Company owns 100% of the working interest in a lease that has a 20%royalty interest. The royalty interest owner is Mr. Heagy. Needing additional funds to develop the property, Libby sold
Upbeat Oil Company acquired an undeveloped lease for which it paid $30,000.The lease is burdened with a 1/8 royalty. Financially unable to develop the lease, Upbeat sold 60% of its working interest

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