1.What purpose does a cost center serve?

Define the following terms: asset retirement obligations common unit of

measure based on energy.

2.Asset retirement obligations – cost expected to be paid in the future in dismantling producing
facilities and restoring the environment to its original condition.
Common unit of measure – a measure of oil and gas in terms of relative energy content (usually
measured in British thermal units (Btus). Either oil or gas is converted to the relative Btu of the
other.

4. Under what circumstances should development costs be excluded in

determining DD&A? Under what circumstances should a portion of proved
developed reserves be excluded in determining DD&A? Is the exclusion of
the development costs or proved developed reserves dependent upon the
choice of the company, or is it required?

A portion of development costs should be excluded if significant development costs have been
incurred before all planned wells have been drilled. Proved development reserves that will be
produced only after significant future development costs have been incurred should be excluded.
In both cases, exclusion is required.

5. Should amortization always be computed using a common unit of measure

based on relative energy when oil and gas reserves are produced jointly? If
not, under what circumstances would amortization not be based on units of
energy? What basis would be used?

No. If the relative proportion of oil and gas produced in the current period is expected to remain
constant, then amortization may be computed using either oil or gas, or if either oil or gas clearly
dominates both the reserves and current production based on relative energy content, then
amortization may be computed using the dominant mineral only.

6. Ajax Oil Corporation drilled its first successful well on Lease A in 2018.
Data for Lease A as of 12/31/18 are as follows:

Lease hold costs .................................... $ 50,000

Well IDC ......................................... 200,000
L&WE........................................... 75,000
Production during 2018.............................. 8,000 bbl
Total estimated proved reserves,12/31/18 ............... 792,000 bbl
Total estimated reserves recoverable from well, 12/31/18 . . . 102,000 bbl

REQUIRED: Compute amortization for 2018.

Ajax Oil Corporation

Leasehold:
IDC & equipment:
7. Chavez Petroleum’s lease in Wyoming produces both oil and gas.
Additional
information as of 1/1/19 follows:
IDC.............................................. $900,000
Proved property costs, net ............................ 100,000
L&WE........................................... 300,000
Beginning of year accumulated DD&A ................. 50,000

Estimated proved reserves, 12/31/19

Oil............................................ 200,000 bbl
Gas ........................................... 1,000,000Mcf

Production during 2019

Oil ............................................ 10,000bbl
Gas........................................... 300,000 Mcf

REQUIRED: Compute amortization assuming the lease is fully developed: a.

Assuming oil is the dominant mineral

b. Using a common unit of measure based on BOE

9.The following are costs incurred on Erath lease:

Acquisition costs ................................... $ 100,000

Well 1 costs ....................................... 2,250,000
Well 2 costs ....................................... 3,000,000
Well 3 costs ....................................... 2,750,000
Tanks, separators, flowlines, etc. ...................... 1,000,000

REQUIRED: Treat each of the following independently:

a. A fourth well, an exploratory well, was drilled at a cost of $2,010,000 and
was determined to be dry. Give the entry to record the dry hole.

b.Give the entry to record abandonment of Well 2. Equipment costing

$50,000 was salvaged. Accumulated DD&A on wells and equipment was
$5,000,000. Wells 1 and 3 are still producing.

c.Give the entry to record abandonment of the entire Erath lease. Assume
the lease constituted a separate amortization base with accumulated DD&A
on leasehold costs of $40,000 and accumulated DD&A on wells and
equipment of $5,000,000.

d.Give the entry to record abandonment of the entire Erath lease, assuming
instead that amortization had been computed on a field-wide basis with
accumulated DD&A on leasehold costs of $300,000 and accumulated DD&A
on wells and equipment of $18,000,000.

Sol.

a. Dry-hole expense .................................................................. 2,010,000

Wells-in-progress............................................................ 2,010,000
b. Equipment inventory (salvage)............................................. 50,000
Accumulated DD&A – L&WE ............................................ 2,950,000
Wells and equipment....................................................... 3,000,000
c. Surrendered lease expense.................................................... 4,060,000
Accumulated DD&A – proved property............................... 40,000
Accumulated DD&A – L&WE ............................................ 5,000,000
Proved property............................................................... 100,000
Wells and equipment....................................................... 9,000,000
d. Accumulated DD&A – proved property............................... 100,000
Accumulated DD&A – wells................................................ 9,000,000
Proved property............................................................... 100,000
Wells and equipment....................................................... 9,000,000

10.The following costs relate to Good Luck Lease as of 12/31/20:

Proved property .................................... $ 100,000
Accumulated DD&A—proved property................. 30,000
Well No.1: Wells and equipment ...................... 350,000
Well No.2: Wells and equipment ...................... 420,000
Accumulated DD&A—wells.......................... 500,000
During early January of 2021, Well No. 2 quit producing and was abandoned.
In March 2021, Well No.1 quit producing, and the well and the lease were
abandoned.
REQUIRED: Prepare journal entries for the abandonments.

Sol:
Entry January, 2021
Accumulated DD&A – L&WE.................................................... 420,000
Wells and equipment .............................................................. 420,000
Entry March, 2021
Accumulated DD&A – proved property...................................... 30,000
Accumulated DD&A – L&WE.................................................... 80,000
Surrendered lease expense ........................................................... 340,000
Proved property ...................................................................... 100,000
Wells and equipment – Wells #1............................................ 350,000
13.
Sol.
14.
Sol.
Entry to record abandonment

Accumulated DD&A – leasehold ......................................... 30,000

Accumulated DD&A – L&WE ............................................ 285,000
Proved property............................................................... 30,000
Wells and equipment – IDC............................................ 215,000
Wells and equipment – L&WE....................................... 70,000

15.Garber Oil Company owns 100% of the working interest in the Williams
lease. The lease is a fully developed lease located in New Mexico. As of
12/31/18, the lease had proved developed reserves of 1,200,000 barrels and
unrecovered costs of $12,000,000. During the third quarter of 2019, a new
reserve study was received that estimated proved developed reserves of
1,500,000 barrels as of August 1, 2019.

REQUIRED: Calculate DD&A for each quarter, assuming the following produc-
tion and using the first method illustrated in the chapter.
Quarter Production

1 30,000 bbl
2 35,000 bbl
July 10,000 bbl
August 15,000 bbl
September 12,000 bbl

4 40,000bbl

SOL
16.
17.
20

Sol
24. The following costs relate to Lease A as of 12/31/18:
Proved property .................................... $ 80,000
Accumulated DD&A—proved property................. 40,000
Well No.1: Wells and equipment ...................... 500,000
Well No.2: Wells and equipment ...................... 360,000
Accumulated DD&A—L&WE........................ 600,000
In January, 2019, Well No. 1 ceased production and was abandoned. In June
2019, Well No. 2 ceased production, and the well and the lease were
abandoned.

REQUIRED: Prepare journal entries for the abandonments.

Sol.
Entry January, 2019
Accumulated DD&A – L&WE.................................................... 500,000
Wells and equipment .............................................................. 500,000
Entry June, 2019
Accumulated DD&A – proved property...................................... 40,000
Accumulated DD&A – L&WE.................................................... 100,000
Surrendered lease expense ........................................................... 300,000
Proved property ...................................................................... 80,000
Wells and equipment – Wells #2............................................ 360,000

25. When computing DD&A for any given period, the book value is
computed
a. By taking the beginning of period costs less beginning of period
accumulated depreciation
b. By taking the end of period costs less beginning of period
accumulated depreciation
c. By taking the costs as of the end of the prior period less
beginning of period accumulated depreciation
d. By taking the costs as of the end of the prior period less
accumulated depreciation as of the end of the prior period
e. None of these apply

26. In depreciating the cost of a well in accordance with the

successful efforts method, which reserves should be used?

a. Proved reserves
b. Proven and probable reserves
c. Proved developed and undeveloped reserves d. Proved developed
 reserves
e. None of these apply

27. In situations where a significant development expenditure has

been made, but a portion of the related proved reserves are not yet
developed, it is necessary to
a. Exclude a portion of the development costs in determining the
DD&A rate
b. Exclude all development costs in determining the DD&A rate
c. Include an estimate of future development costs in determining
the
DD&A rate
d. Exclude all future development costs in determining the DD&A
rate
e. None of these apply

28. Support equipment and facilities that service a particular field or

other area consti- tuting a cost center should be capitalized and
depreciated using the _________ method over the proved developed
reserves of the cost center.
a. Unit of production b. Straight-line
c. Any reasonable

29. When would it be appropriate to recognize a gain or loss on the

plug and aban- donment of a well?
a. Any time a well that is not fully depreciated is plugged and
abandoned
b. Any time a well that is fully depreciated is plugged and abandoned
c. When it is the last well in a field
d. When the oil prices decline dramatically
e. None of these apply

30. When would it be appropriate to recognize a gain or loss on the

abandonment or retirement of a well or individual item of equipment?
a. If the well or individual item of equipment constitutes a part of
an amortization base
b. When a major abnormality occurs
c. When the DD&A is being computed on the basis of a cost pool
that consists
of a single reservoir or group of reservoirs relating to a single
geological
structural feature
d. When the abandonment constitutes a partial retirement
e. None of these apply
31. Under what circumstances can DD&A be computed on the basis
of a single mineral despite the fact that oil and gas are jointly
produced?
a. If the relative proportion of oil and gas extracted in the current
period is expected to continue throughout the remaining
productive life of the property
b. If the relative proportion of oil and gas extracted in the current
period is expected to continue throughout the remaining fiscal
year
c. If either oil or gas clearly dominates both proved and proved
developed reserves
d. If either oil or gas clearly dominates the current production in
both the current and past periods
e. None of these apply

32. Under US GAAP, when would royalty reserves be included in the

DD&A calculation made by a working interest owner?
a. When using the working interest method
b. When using the economic interest method
c. When the reserves represent an economic entitlement under a
PSC or similar contract
d. Only if the working interest owner also owns the royalty
e. Always

33. “A porous and permeable underground formation containing a

natural accumulation of producible oil or gas that is confined by
impermeable rock or water barriers and is individual and separate from
other reservoirs.” This is the definition of ____________

a. A field
b. A reservoir
c. A cost center
d. A contract area
e. None of these apply

34. When multiple companies share in the working interest in a

property and each company computes its share of reserves and
production by multiplying its working interest percentage by the net-of-
royalty reserves and production, the companies are

a. Using the net-of-royalty method

b. Using the economic interest method
c. Using the economic entitlement method d. Using the working
 interest method
e. None of these apply

35. A company indicates in its 10K that it converted oil and gas to a
common unit of measure by dividing its natural gas reserves and
production by a factor of 5.81. That company is using the ____________
approach to compute equivalent units.

a. Unit-of-production
b. British thermal unit
c. BOE
d. Relative value
e. None of these

25. b. 26. d. 27. a. 28. a. 29. c. 30. b. 31. e. 32. d. 33. b. 34. d. 35. b