Kingdom of Saudi Arabia

Royal Commission at Yanbu

Yanbu University College
Department of Management Sciences and Industrial Management Technology
Yanbu Al-Sinaiyah

«A.Y.: 2022-2023»
ACCT-316 OIL AND GAS ACCOUNTING
CLASSWORK3a First Semester 1444
(441)

Day: Wednesday
FOR INSTRUCTOR USE: CLO TABLE
Date: 27th March Q. Max Marks
CLO
No. Mark Scored
Time: CLO-3
Competence 2.1
1
Serial Number:
TOTAL 1
ID:

Student Name

Section: 1

Teacher: Dr. Mohammad Aamir Khan

GENERAL INSTRUCTIONS:
1- Classwork must be neatly written
2- Tables must be neatly drawn.
3-Late submissions will be penalized.

316 Classwork02-Mod III Ch3 Page 1 of 15

PROBLEMS

1. Tiger Oil Company obtained shooting rights on 10,000 acres at $2 per acre and then
hired an independent geological firm to conduct the initial G&G work for $60,000. As a
result of the G&G work, Tiger Company decided to lease 500 acres (ignore acquisition
costs) and hired the same company to perform detailed G&G studies on the 500 acres at a
cost of $15,000. Give the entries to record these transactions.

G&G Expense(10,000x$2)$20,000
Cash20,000

G&G Expense $60,000

Cash60,000

G&G Expense$15,000
Cash$15,000

Page 2 of 15
2. Wildcat Oil Company obtained a lease on March 1, 2005. Being short of funds,
Wildcat Oil Company did not begin drilling operations during the first year of the primary
term and on March 1, 2006, made a delay rental payment of $8,000. On May 12, 2006, the
company paid a bottom-hole contribution of $30,000. The information obtained from this
well was so encouraging that Wildcat Oil Company decided to begin drilling operations;
however, there were some title problems and drilling was delayed. Legal costs incurred for
title defense were $50,000. Give the entries.

DR Delay rental exp $8,000

CR Cash $8,000

DR Test-well contribution exp $30,000

CR Cash $30,000

DR Legal exp- exploration $50,000

CR Cash $50,000

Page 3 of 15
 3. During 2006, the exploration department of Red Ink Oil Company incurred
thefollowing costs in exploring South Texas fields. Give the entries.

Shooting rights ............................................................................................ $ 12,000

Bottom-hole contribution .......................................................................... 40,000

Supplies for exploration (G&G) activities ................................................ 8,000

Salaries for exploration (G&G) activities ................................................ 100,000

Mapping costs for exploration (G&G) activities ..................................... 15,000

Depreciation of exploration (G&G) equipment .....................................20,000

Transportation for seismic crew ................................................................. 5,000

Operating costs for exploration (G&G) equipment ..................................3,000

G&G expense-shooting rights 12,000

Test-well contribution expense 40,000
G&G expense – supplies 8,000
G&G expense – salaries 100,000
G&G expense – mapping 15,000
G&G expense – depreciation 20,000
G&G expense – transportation 5,000
G&G expense - operating costs 3,000
Cash 183,000
Accumulated depreciation 20,000

Page 4 of 15
4. Universal Oil Company obtained the rights to shoot 25,000 acres at a cost of
$0.20/acre on May 3, 2007. Universal contracted and paid $80,000 for a reconnaissance survey during
2007. As a result of this broad exploration study, Lease A and Lease B were leased on January 9,
2008. (Ignore acquisition costs.) The two properties totaled 1,500 acres, and each had a delay rental
clause requiring a payment of $2 per acre if drilling was not commenced by the end of each full year
during the primary term.
Detailed surveys costing a total of $30,000 were done during January and February onthe leases.

During July, Universal entered into two test-well contribution agreements: a bottomhole contribution
agreement for $15,000, with a specified depth of 10,000 feet, and a dry-hole contribution of $20,000,
also with a specified depth of 10,000 feet. In November both wells were drilled to 10,000 feet. The well
with the bottom-hole contribution was successful, but the well with the dry-hole contribution was dry.
The cost for maintaining land and lease records allocated to these two properties for 2008 was $2,000.
Ad valorem taxes were assessed on Universal’s economic interest in both

properties, amounting to $2,500 for 2008. After preparing their financial statements for 2008, Universal
decided to delay drilling on these properties until sometime in 2010. On April 15, 2010, enough money
was left after paying taxes for a well to be drilled on Lease
B. Before drilling the well, costs of $7,000 were incurred to successfully defend a title suit concerning
Lease B. Give all entries necessary to record these transactions. Assume any necessary delay rental
payments were made.
G&G expense 5000
Cash 5000

G&G expense 80000

Cash 80000

G&G expense 3000

Cash 3000

Detailed surveys 30000

Cash 30000

Test well contribution expense 20000

Page 5 of 15
Cash 20000

Property expense 2000

Cash 2000

Properties tax expense 2500

Cash 2500

Legal expense exploration 7000

Cash 7000

Page 6 of 15
 5. Discuss why each party to a test-well contribution situation would enter into the
transaction.

Payments paid by one working interest owner to another working interest owner of a different property are
known as test-well contributions. The test-well contribution paying working interest owner agrees to pay this
sum to the other party in exchange for G&G data obtained by the other party during the drilling of a well.In
exchange for financial reward, the person receiving the payment is willing to provide the data gathered by
drilling the well.

Page 7 of 15
6. Aggie Oil Company purchased seismic equipment on March 1, 2007, costing $100,000.
The seismic equipment was used in G&G operations for the remainder of the calendar
year, 2007. Compute straight-line depreciation for 2007, assuming a 10-year life and no
salvage value, and prepare the entries to record the purchase and depreciation of the
equipment.

DR Seismic equipment 100,000

CR Cash 100,000

Dep exp= 100,000/10= 10000

DR G&G expense - depreciation 10,000

CR Acc depreciation 10,000

Page 8 of 15
 7. Hard Luck Oil Company had the following transactions in 2007 concerning test-
wellcontributions:

a. Contracted with Tiger Oil Company, agreeing to pay $50,000 if a well was drilled on Tiger’s
lease to a depth of 10,000 feet.

b. Contracted to pay Landa Oil Company $40,000 if a well being drilled on Landa’s property
was dry.

c. Agreed to pay Richards Oil Company $100,000 if a well being drilled reached a depth of 7,500
feet.

Results from the above transactions were the following:

a. Because of mechanical difficulty, the Tiger well was abandoned at 9,500 feet.

b. The Landa well was dry.

c. The Richards well was completed as a producer at 12,000 feet.

Prepare entries for the above transactions, assuming Hard Luck Oil Company fulfilled its contractual
obligations.

A) No entry

B) Test-well contribution expense 40,000

Cash 40,0000

c) B) Test-well contribution expense 100,000

Cash 100,0000

Page 9 of 15
 8. Basic Oil Company conducted G&G activities on leases owned by Artificial Oil
Companyand Universal Oil Company. Each agreement provides for Basic Oil Company to
receive 1/4 of each WI if proved reserves are found and to be reimbursed if proved
reserves are not found. Basic Oil Company incurred the following G&G costs on Artificial
and Universal’s leases:

Artificial $50,000
Universal $40,000
The well drilled on the Artificial Oil lease was successful, and 1/4 of the WI was assigned. Drilling on
the Universal lease resulted in a dry hole, and Basic was reimbursed for the G&G costs incurred.
Prepare entries for the above transactions.

Artificial (1) account receivable 50000

Cash 50000

Universal (1) account receivable 40000

Cash 40000

Artificial (2) proved property 50000 1/4 of the WI

Account receivable 50000

Universal (2) cash 40000 1/4 of the WI

Account receivable 40000

Page 10 of 15
9. Core Oil Company obtained a three-year lease on 1,000 acres on May 1, 2004 that
contained a $3 per acre delay rental clause. Drilling operations were started on June 15,
2005 and completed on October 16, 2005. The well, determined to be dry, was plugged and
abandoned. No further drilling operations were started during the primary term. All
required delay rentals were paid. Give all entries relating to the delay rental requirement.

May 1, 2004
DR Delay rental exp 3000
CR Cash 3000

May 2, 2005
DR Delay rental exp 3000
CR Cash 3000

Page 11 of 15
 10. Fossil Oil Company entered into two test-well contribution agreements as follows:

a. On May 17, 2004, a bottom-hole agreement was obtained requiring a payment of

$45,000 when the contract depth of 10,000 feet was reached. The contract depth was reached on
September 21, 2004, and the required payment was made.

b. On September 30, 2004, a dry-hole test-well contribution was entered into requiring payment of
$50,000 if the well was dry but no payment if the well was successful.

1) Assume the well is successful.

2) Assume the well is dry.

Prepare necessary entries for the above transactions.

Sept. 21, 2014:

Test-well contribution expense 45,000

Cash 45,000
No payment necessary

2. Test-well contribution expense 50,000

Cash 50,000

The contract's conditions do not call for revenue to be recognized because the project's outcome was not
favorable.

Page 12 of 15
11. Dixie Company obtained seismic equipment on January 1, 2004, at a cost of
$100,000. The equipment was used in G&G operations for the calendar year, 2004. The equipment
has an estimated life of 10 years with a salvage value of $20,000. The company uses the straight-line
method in computing depreciation. Record the depreciation for the year 2004.

Dep expense = 100,000-20,000/10 = 8000

DR G&G expense-depreciation 8,000

CR Accumulated depreciation 8,000

Page 13 of 15
 12. During 2005, Fortunate Oil Company obtained the
following leases:Lease Acres
A 3,000

B 4,000

C 5,000

In obtaining these leases, Fortunate Oil Company incurred shooting rights on Leases A and C at
$0.50 an acre and incurred the following costs:

Salaries for exploration activities ....................................................... $50,000

Mapping costs for exploration activities ............................................ 20,000

Minor repairs of G&G exploration equipment ............................... 1,000

Give entries for the above transactions.

3000*$0.5+5000*$0.5= $4000

DR G&G exp shooting rights $4000

CR Cash $4000

DR G&G Exp salaries $50,000

CR Cash $50,000

DR G&G Exp mapping cost 20,000

CR Cash 20,000

DR G&G Exp repairs 1,000

CR Cash 1,000

Page 14 of 15
Define the following:

Shooting right: privileges granted to the oil business that often occur before the corporation obtains a mineral
lease and give it access to the site to conduct G&G activities.

G&G costs: Include any damages or rent paid to the owner of the surface interest as well as all expenses linked
to carrying out geological and geophysical studies as well as the cost of obtaining access rights to properties for
such studies.

Carrying costs: costs incurred primarily to maintain the lessee's property rights, not to acquire those rights

Dry-hole test-well contribution: a payment made in return for G&G information only if the well is dry or not
economically producible.

Bottom-hole test-well contribution: a payment made in return for G&G information when an agreed-upon depth
is reached, regardless of the outcome of the well.

Page 15 of 15
 13. Big John Oil Company agreed to conduct G&G studies and other exploration
activities on a lease owned by Young Oil Company in exchange for an interest in the
property if proved reserves are found. If proved reserves are not found, Big John will be
reimbursedfor costs incurred.

a. Big John incurs $200,000 of exploration costs.

b. Assume proved reserves are found.

c. Assume instead that proved reserves are not found. Give any
entries required.

a
Account Receivable $200,000
Cash $200,000

b
Proved property $200,000
Account Receivable $200,000

c
Cash $200,000
Account Receivable $200,000

Page 16 of 15