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

Exercise 4

On January 1, 2010, Local Petroleum entered into a concession agreement with the
government of Egypt and paid a $3,000,000 signing bonus. The agreement covers
20,000 acres, has a term of five years, and requires that exploration begin immediately.
At the end of the first three years, Local is required to begin relinquishing acreage at a
rate of 25% of the contract area per year. However, Local is not required to relinquish
proved acreage. On July 16, 2012, Local makes a commercial discovery and determines
that a 1,000 acre block is proved. On December 31, 2012, 25% of the initial contract
area is relinquished. Local estimates that only another 25% of the original contract
acreage will be relinquished.
Prepare all journal entries that would be required to account for the concession area
from January 1, 2010 through December 31, 2012.