Gamma Petroleum owns 100% of the working interest in the Bearcat Field in Wyoming. The field has been producing for 3 years and is expected to produce for 10 more years. Since the state has very stringent decommissioning and environmental statutes, an ARO has been estimated and booked. The local oilfield workers have unionized, and as a consequence, a significant increase in labor costs is anticipated. Therefore, Gamma must test for impairment of the field.

Assume the following:

REQUIRED: Determine if impairment is necessary. If so, prepare the journal entries to record the impairment.

Transcribed Image Text:

Estimated future net cash flows before ARO Estimated ARO cash flows Estimated future net cash flows after ARO Net book value of field assets Net book value of field assets without ARO Undiscounted $10,500,000 (4,000,000) $ 6,500,000 $10,800,000 9,000,000 Discounted $ 6,200,000 (1,852,780) $ 4,347,220