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

Exercise 17

Frontier Company, a successful efforts company, owns a working interest in an oil field
in Oklahoma. The field has been producing for a number of years and is expected to
be producing for another 10 years. On January 1, 2019, the net book value of the field
wells, equipment, and facilities totals $4,500,000. Frontier determines that it should
book an ARO in relation to the field. The undiscounted future cash flows to settle the
ARO are estimated to be $2,000,000. When discounted at a rate of 8% for 10 years, the
present value is $926,390.
Frontier's chief accountant indicates that the field should be assessed for impairment.
Analysis yields the following information: REqUIRED:
a. Make the entry to record the ARO on January 1, 2019.
b. Determine the net book value of the field after the ARO is recorded.
c. Explain how impairment would be computed if circumstances indicated the asset
may be impaired.