Questions and Answers of Fundamental Accounting

Lomas Company owns 100% of the working interest in an unproved property with a 1/5 royalty interest. Lomas conveys 40% of the working interest in the property to Mason Company in return for Mason
Hays Company (a successful efforts company) owns 100% WI in a lease that is burdened with a 1/8 royalty interest owned by Alfred Smith. The undeveloped lease has capitalized costs of $40,000 and an
JD Company owns a 100% WI in a proved property with net capitalized costs of $200,000. JD Company sold the lease for $350,000 cash and a production payment of $160,000, plus interest of 8% to be paid
Zeke Company owns a proved property with the following costs:(separate amortization base)Zeke Company sells 100% of the working interest in the property to Torrance Company for $700,000.REQUIRED:a.
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
Bore Oil Company owns 100% of the working interest in a fully developed lease burdened with a 1/8 royalty interest. The lease has the following capitalized costs and reserves data as of January 1,
Rain Company owns 100% of the working interest in a fully developed lease on which there is a 1/8 royalty interest. The lease has the following capitalized costs and reserve data as of January 1,
In 2018, Port Company purchased the working interest of an unproved lease for$100,000. In 2019, Port Company recognized impairment of $20,000 on this lease.In 2020, Port Company sold the entire
Lexington Company sold 50% of the working interest in a proved lease to Cantu Company for $500,000. Lexington Company’s net cost basis in this proved property was $300,000. Lexington Company uses
Four companies own adjacent leases that share a common reservoir. The companies each have a 100% working interest in their respective leases in which they have the following investment:The companies
Zinc Company acquired 100% of the working interest in an unproved property at a cost of $100,000. Zinc later sold the working interest, retaining an overriding royalty interest (ORI).REQUIRED: Give
Frontier Company, a successful efforts company, has a 1/6 royalty interest in an unproved property. Assume that Frontier Company’s net capitalized cost in the property is $200,000.REQUIRED: Give
Launch Oil Company, a successful efforts company, owns 100% of the working interest in a 320-acre proved property with the following net unamortized costs:Launch Oil Company sells 100% of the working
Greene Company sold its 100% WI in a proved property for $700,000 and retained an ORI. Greene’s net cost basis in the property was $450,000. The fair market value of the entire original working
Universal Company owns a 100% WI in an unproved property for which it paid$80,000. The property has a 1/8 royalty interest. Universal Company agrees to farm out the working interest to Gene Company
George Company signed a lease agreement with Donald Hill covering 900 acres in Oklahoma. Mr. Hill received a bonus of $50,000 and a 1/5 royalty interest, and George Company received 100% of the
Harper Oil Company, a successful efforts company, has an undeveloped lease for which it paid $180,000. The property was individually significant, and individual impairment of $50,000 had been
Richards Oil Company, a successful efforts company, has an undeveloped property for which it paid $80,000. The property is not considered to be individually significant.REQUIRED: Make the journal
Batch Company, a full cost company, has an unproved lease for which it paid$200,000. Give the entry to record the sale of the property, assuming Batch Company sold the property for:a. $150,000b.
Basic Oil Company, a successful efforts company, owns an ORI in an unproved property that cost $50,000. The ORI has not been impaired. Assume Basic sold its entire interest in the ORI for the
Jumper Company receives $150,000 from Garza Company in payment for the right to purchase natural gas in the future.REQUIRED: Prepare journal entries for each company, assuming that they both use the
French Oil Company is a successful efforts company that began operations in 2018. The company owns 100% of the working interest in a proved property that has the following capitalized costs:A 1/8
Wildcat Oil Company owns a 100% WI in a proved property in Hays County, Texas. Wildcat sells the working interest to Knight Oil Company for $500,000, plus a retained production payment interest of
Wise Oil Company, a full cost company, has total capitalized costs in Cameroon of $50,000,000 and accumulated DD&A of $10,000,000. Proved reserves in Cameroon are 4,000,000 barrels. Reserves of
Carved-out volumetric production payments payable out of specific reserves in place, but where there is no obligation for the producer to make up any inadequate production, are to be accounted for as
Under full cost accounting, how are sales of individual properties accounted for?a. They are accounted for by adjustments to the cost pool. Gains and losses are not to be recognized.b. Losses are to
ABC Company has 49% of the WI in a proved property in Norway. Delphi Petroleum Company owns 51% of the WI. In order to produce oil from the reservoir, a platform and production facilities must be
Farm-in/farm-out agreements are ______________.a. Nonmonetary transactions for which no gains or losses are to be recognizedb. Nonmonetary transactions that must be valued at fair valuec. Nonmonetary
What is the accounting treatment for a sale of part of an interest in an unproved property?a. The selling price is treated as a recovery of cost with no gain or loss recognized. However, if the
In which type of arrangement is it likely that a penalty is assessed on the carried party’s share of cost?a. A carried working interest in an undivided interestb. A carried working interest in a
Filbert Oil Company owns 100% of the working interest in an unproved lease that it acquired for $100,000. The property is individually significant, and individual impairment of $20,000 had been
Is it ever appropriate for the sale of a partial interest in a proved property to be accounted for as a normal retirement?a. Yes, that is the required treatment.b. Yes, but only if doing so does not
Company Z owns a 100% WI in a proved property with net capitalized costs of $100,000. Company Z sold the property for $250,000 cash and a production payment of $150,000 plus interest of 10% to be
Cox Oil Company enters into an agreement to lease 80 acres from Ruby Jones.Jones receives a $15,000 bonus and a 1/8 royalty interest, and Cox Oil Company owns a 100% WI. In a separate agreement,
What companies are required to present the disclosures specified by ASU 932-235-50?
Which disclosures are different for a successful efforts company compared to a full cost company?
According to ASU 932-235-50, what is a publicly traded company?
Discuss the disclosures required for exploratory well costs that continue to be capitalized for a period longer than one year beyond completion of drilling.
In reporting proved oil and gas reserves, how are geographic areas determined?
Which costs are to be included in the disclosure of results of operations of oil and gas producing activities?
Which revenues are to be included in the disclosure of results of operations of oil and gas producing activities?
Does the standardized measure reflect the fair value of a company’s proved reserves? Why or why not?
What prices and costs are to be used in calculating the future cash flows for purposes of the SMOG disclosure?
Which disclosure is required of all companies with oil and gas producing activities?a. SMOGb. Accounting methodc. Proved oil and gas reserve informationd. Capitalized costse. All of these
The standardized measure of future net cash flows from the production of proved oil and gas reserves must be disclosed by which companies?a. All companies with oil and gas producing activitiesb.
A publicly traded company is any business entity _______________.a. That is traded on a domestic stock exchange or over-the-counter market at the local, regional, or national levelb. That is involved
Which disclosures are not supplemental?a. SMOG disclosuresb. Proved oil and gas reserve informationc. Costs incurred in oil and gas producing operationsd. Evaluation of exploratory well costse. All
Reserves of synthetic natural gas liquids are to be reported in the disclosure of proved oil and gas reserve information measured ina. Cubic feetb. Barrelsc. Litersd. Gallonse. None of these
Which of the following are not included in the reported changes in proved oil and gas reserves in the disclosure of proved oil and gas reserve information?a. Changes due to improved recovery are not
Westfield Oil and Gas Company owns a 75% working interest in the Beckman lease that has a 1/5 royalty. The estimated proved oil and gas reserves expected to be recoverable from the Beckman lease
In the disclosure of capitalized costs relating to oil and gas producing activities, which cost categories should not be included?a. Mineral interests in properties are not included.b. Support
In the disclosure of costs incurred for property acquisition, exploration, and development activities, costs must be broken down between those that were capitalized and those that were expensed.a.
Which costs are the main categories of expenses to be included in the disclosure of result of operations for oil and gas producing activities?a. Production costsb. Exploration expensesc.
Full cost companies are not required to prepare a separate disclosure of result of operations for oil and gas producing activities.a. Trueb. False
The disclosure of result of operations for oil and gas producing activities should aid in the comparison of which of the following?a. Integrated versus nonintegrated oil and gas companiesb.
The standardized measure of discounted future net cash flows is not intended to reflect the actual value of an oil and gas company.a. Trueb. False
What discount rate is to be used in the calculation of the standardized measure of discounted future net cash flows?a. The current market interest rateb. The entity’s weighted average cost of
In computing the changes in the standardized measure, which should be computed first?a. The effect of changes in prices and costsb. The effect of changes due to revisions in estimatesc. Accretion of
What geographic area may be defined for purposes of disclosure of proved oil and gas reserves?a. An individual countryb. A group of countries within a continentc. An entire continentd. Any of thesee.
Reserves of crude oil and synthetic oil are to be reported in _______________.a. Barrelsb. Barrels of oil equivalentc. Cubic feetd. Cubic feet equivalente. Any of these
Casing Oil, a successful efforts company, began operations on January 1, 20XA.Assume the following facts about Casing’s first two years of operations. All reserve and production quantities apply
Buckley Oil Company, a successful efforts company, began operations January 1, 20XA. Assume the following facts about Buckley’s first two years of operations:Assume a tax rate of 40%, and that
Wildcat Oil Company began operations on January 1, 20XA. The following facts relate to Wildcat’s first two years of operations. All reserve and production quantities apply only to Wildcat Oil’s
Tiger Oil began operations on January 1, 20XA. Assume the following facts about Tiger’s first two years of operations. All reserve and production quantities apply only to Tiger Oil’s interest.
What is the reserve replacement ratio? What is the reserve replacement ratio attempting to measure? How would you interpret it?
What is the reserve life ratio? What is the reserve life ratio attempting to measure?How would you interpret it?
What does a high ratio of net wells to gross wells indicate?
What does a low ratio of average reserves per well indicate?
How do you interpret the average daily production per well ratio?
Discuss the difficulties with computing and applying finding costs ratios.
How do you interpret finding cost ratios? Why are they so popular in financial statement analysis?
What does a high (or low) lifting cost per BOE indicate? When does lifting cost per BOE indicate that costs are effectively being controlled at the field level?
How do you interpret DD&A per BOE?
What is the value of proved reserve additions ratio attempting to measure?How do you interpret the value of proved reserve additions ratio?
What is the value added ratio? What does a high (or low) value added ratio indicate?
The following reserve table appeared in the financial statements of Tyler Company:REQUIRED: Compute the following ratios for all three years:a. The reserve replacement ratio computed for all three
Tyler Company reported the following expenses in its financial statements(in thousands):REQUIRED: Using the reserve disclosure for Tyler Company given in problem13 and the data presented in this
What is your assessment of the performance and future potential of Tyler Company?
Which of the following disclosures must be reported by geographic area?a. The average sales price (including transfers) per unit of oil produced and of gas producedb. The average production cost
The ____________ratio measures a company’s success in replacing production and accordingly measures a company’s ability to continue to operate in the future.a. Reserve lifeb. Reserve
Desirably, a company should have a reserve replacement ratio of at least 1.a. Trueb. False
The reserve replacement ratio is somewhat problematic, since it does not reflect which of the following?a. The quantity of reserves replacedb. The time value of moneyc. The value of the reserve
If a company has both oil and gas reserves, the reserve replacement ratio and the reserve life ratio are typically calculated separately for each mineral.a. False. They are computed in BOE.b. True.
The _________ ratio is used to approximate or measure the number of years that production could continue at the current rate if no new reserves were added.a. Reserve lifeb. Reserve replacementc.
_______________ is computed by multiplying each well in which a company has a working interest by the relevant working interest percentage and summing the result.a. Net to gross wellsb. Total
The higher the average reserves per well ratio, the greater thea. Company’s future profit potentialb. Future growth ratec. Reserve replacement ratiod. Reserve life ratioe. All of these
In computing ____________, there should be correspondence or matching between the costs in the numerator and the reserves in the denominator.a. Lifting costs per BOEb. DD&A per BOEc. Finding costs
_____________is a measure that may be used to evaluate the extent to which a company is controlling its operating costs or how efficiently the company is getting oil and gas out of the ground, or
Which of the following is not necessarily helpful in assessing current period efficiencies?a. Lifting costs per BOEb. DD&A per BOEc. Finding costs per BOEd. Value of reserve additions per BOEe. None
The objective of the ________ is to compare the cost of finding reserves with the value added by those reserves.a. Value of reserves per BOEb. Value of proved reserve additions per BOEc. Value added
Define the following terms:domestic market obligationringfencingcost oilprofit oilcapital upliftproduction bonussliding scale royaltytax holidayroyalty holidaygovernment participation
Explain the difference between the following:concessionary systemcontractual system
Explain the key difference between the following contracts:nonrisk service contractrisk service contract
Describe the similarities and differences between PSCs and risk service contracts.
Discuss the various methods that governments utilize to generate revenues and other benefits from mineral resources.
Explain how estimation of a company’s net proved reserves differs when operating under a concessionary contract versus a PSC.
Federal Oil Company enters into a concession agreement with the British government.Federal pays the government a $12,000,000 (US) signing bonus and agrees to pay the government royalties of 10% of
Cooper Oil Company enters into a risk service agreement with the Chilean government.Cooper Oil Company pays the government, in US dollars, an $8,000,000 signing bonus and also agrees to pay all of
Venture Oil Company operates under a PSC agreement in the South China Sea.Venture has 49% of the working interest, and Sinhai Oil Company (which is owned by the Chinese government) has 51% of the
Assume that Express Oil Company, a US company, is involved in petroleum operations in Thailand. Express Oil Company has a 40% WI, while the Local Oil Company has a 60% WI. Annual gross production is

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