Fundamentals of Oil & Gas Accounting 5th Edition by Rebecca Gallun, Charlotte Wright

Exercise 13

Gamma Oil Company obtained the rights to shoot 25,000 acres at a cost of $0.20/
acre on May 3, 2017. Gamma contracted and paid $80,000 for a reconnaissance
survey during 2017. As a result of this broad exploration study, Lease A and Lease B
were leased on January 9, 2018. (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 on
the leases.
During July, Gamma entered into two test-well contribution agreements: a bottom-hole
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
2018 was $2,000. Ad valorem taxes were assessed on Gamma's economic interest
in both properties, amounting to $2,500 for 2018. After preparing their financial
statements for 2018, Gamma decided to delay drilling on these properties until some
time in 2020.
On April 15, 2020, 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.