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, Duster Petroleum enters into an agreement to lease 80 acres from Alfred Ramirez, wherein Ramirez receives a $5,000 bonus and a 1/8 royalty interest and Duster Petroleum owns a 100%

WI. The Jones and Ramirez leases are located on adjoining acreage. Cox Oil Company and Duster Petroleum decide to pool their leases in order to develop and operate the properties efficiently. Ownership interests are recalculated based on acreage contributed. The pooled property consists of 160 acres. How do Cox Oil Company and Duster Petroleum account for this transaction? Assume the companies use the successful efforts method.

a. This transaction would result in no accounting entries for either party.

b. To the extent that the property’s fair market value can be determined, the unamortized cost of the working interest should be allocated between the interest conveyed and the interest retained, and gain or loss recognized.

c. To the extent that the property’s fair market value can be determined, the amount is treated as a reduction to the unamortized cost of the working interest. If the fair market value is less than the unamortized cost, a loss would be recognized.

d. This transaction would result in no accounting entries for either party.

However, the companies would need to adjust the proved reserves owned by each party.

e. None of these applies.