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

Exercise 16

Ellis Company, a successful efforts company, has 100% of the working interest in a field
in Texas. The field constitutes a cost center and is also an asset group for purposes of
testing for impairment. In 2016, the price of oil dropped significantly; therefore, Ellis
must test for impairment. The table below reflects Ellis's latest expected cash flows and
risk-free rates for the remainder of the life of the field. REqUIRED:
a. Assume that Ellis's carrying value for the field is $300 million. Determine whether
Ellis must book impairment and, if so, record the necessary journal entry. Round
the present value factors to four decimal places.
b. Assume that Ellis's carrying value for the field is $400 million. Determine whether
Ellis must book impairment and, if so, record the necessary journal entry. Round
the present value factors to four decimal places.