The following supplemental RRA information is taken from the 2015 annual report of HL Oil & Gas
Question:
HL Oil & Gas Ltd.
Statement of Changes in Standardized Measure
Year Ended December 31, 2015
Present value, January 1, 2015 .................$ 6,500
Sales of oil and gas, net of production costs ............ (2,000)
Changes in prices of oil and gas, net of changes in production costs... 1,200
Extensions and discoveries of proved reserves, net ........... 1,500
Accretion of discount..................... 700
Revisions to quantity estimates ................. (200)
Present value, December 31, 2015 .................. $ 7,700
Required
a. Prepare an income statement for 2015 on an RRA basis.
b. Use the concepts of relevance and reliability to explain why the standardized measure is not applied to unproved reserves in RRA.
c. Explain why present value calculations for oil and gas reserves lay down a mandatory 10% discount rate. What is an advantage and disadvantage to requiring all firms to use a common discount rate?
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