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Fundamentals of Oil & Gas Accounting 5th Edition by Rebecca Gallun, Charlotte Wright
Edition 5ISBN: 9781630181031Fundamentals of Oil & Gas Accounting 5th Edition by Rebecca Gallun, Charlotte Wright
Edition 5ISBN: 9781630181031 Exercise 2
Pressure Oil Corporation owns a working interest in an oil and gas lease. Lacking
the funds to develop the lease, Pressure assigns the working interest to Tritium Oil
Company, reserving 1/32 of 6/7 of production. What kind of interest has Tritium
acquired? What kind of interest has Pressure retained?
the funds to develop the lease, Pressure assigns the working interest to Tritium Oil
Company, reserving 1/32 of 6/7 of production. What kind of interest has Tritium
acquired? What kind of interest has Pressure retained?
Explanation
Verified
Verified
Overriding royalty interest
Unlike royalty interest it does not entitle the owner to enjoy the ownership of minerals underlying in the ground. Thus under such type of interest without paying for cost of production and exploration the lessor ascertains a portion of the profit being generated from the sale of oil and gas production. Therefore ordinary royalty interest arises when the working interest is transferred, sold or being carved out due to some reason.
Thus in this case, P Corporation owns interest in gas and oil lease. However due to lack of funds to proceed with development of well P assign his interest to T Company reserving his share of revenue in the lease. Since in this situation P has transferred his working interest to T a carved out overriding royalty interest is being initiated. Hence the interest retained by P Corporation is overriding royalty interest.
Unlike royalty interest it does not entitle the owner to enjoy the ownership of minerals underlying in the ground. Thus under such type of interest without paying for cost of production and exploration the lessor ascertains a portion of the profit being generated from the sale of oil and gas production. Therefore ordinary royalty interest arises when the working interest is transferred, sold or being carved out due to some reason.
Thus in this case, P Corporation owns interest in gas and oil lease. However due to lack of funds to proceed with development of well P assign his interest to T Company reserving his share of revenue in the lease. Since in this situation P has transferred his working interest to T a carved out overriding royalty interest is being initiated. Hence the interest retained by P Corporation is overriding royalty interest.
Fundamentals of Oil & Gas Accounting 5th Edition by Rebecca Gallun, Charlotte Wright
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