Dexter Oil Company (“DOC”) decided to drill an exploratory well during April 201

Question

Dexter Oil Company (“DOC”) decided to drill an exploratory well during April 2015. In preparing the drilling pad, DOC paid $125,000 for clearing & leveling the site and building an access road. On May 1, 2015, DOC received a statement for $98,000 from a drilling contractor for work performed on the first well of the Dorothy DiTirro lease. A lease bonus payment of $21,000 was paid on March 31, 2015. Preparation costs of $130,000 were incurred for digging a mud pit and $20,000 for pipes for the water line installed. Based on the well log and drill stem tests which cost $75,000, Dexter decided to complete the Dorothy DiTirro lease. Casing was set at a cost of $135,000 and $60,000 for cementing services. DOC also incurred $25,000 for a Christmas tree and installation costs of $5,000. Lastly, DOC paid $40,000 for perforating the well. What are the entries for the activities describe above. Consider the work on the Dorothy DiTirro Well #1 was finished and proved reserves were found – prepare the accounting entries using Successful Efforts (SE) of accounting

Explanation / Answer

As per US - GAAP under successful efforts of accounting,

April 2015 Clearing and levelling site and builiding an access road of $125000.00 was incurred prior to lease acquisition. So, amount of $ 1250000.00 should be effected against income statement.

Entry :   Clearing and levelling site and building access road   a/c        Dr               125000.00

                          To Income statement a/c                                                                                        125000.00On

On March 2015 Lease Bonus payment of $ 21000 was paid which is treated as Property acqusition costs such as leasehold costs which should be capitalized and treated as acquisition expenses.

Preparation cost for digging mud pit of $ 130000.00 are Exploration and evaluation expenses which is intangible expenses and are effected to income statement.

Pipes for water line installed of $ 20000.00, Perforating well of $40000.00 are treated as development costs and should be capitalised.

Casing of $135000.00, Cementing services of $60000.00, Christmas tree of $ 25000.00 and Installation cost of $ 5000.00 should be treated as production expenses and should be effected in income statement.

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