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

Exercise 9

Railway Oil and Gas Company owned the following unproved property as of the end
of 2010: Although no activity took place on Lease A during the year, Railway decided that
Lease A was not impaired, because there were still three years left in that lease's
primary term. Two dry holes were drilled on Lease B during the year; but because
Railway intended to drill one more well on Lease B in the coming year, it decided that
Lease B was only 40% impaired. With respect to the individually insignificant leases,
past experience indicates that 70% of all unproved properties assessed on a group basis
will eventually be abandoned. Railway's policy is to provide at year-end an allowance
equal to 70% of the gross cost of these properties. The allowance account had a
balance of $20,000 at year-end. Give the entries to record impairment.