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

Exercise 6

On January 1, 20XA, Rain Oil Corporation bought a developed lease for $300,000.
During 20XA, Rain Oil Corporation incurred $600,000 of IDC on a successful well.
Reserves of 400,000 barrels were discovered, and 100,000 barrels were produced
and sold. Gross income from production was $2,000,000. On January 4, 20XB, the
company sold the property for $700,000. All reserve, production, and sales data apply
only to Rain Oil Corporation.
a. Determine the amount of ordinary income and the amount of any capital gain
assuming Rain Oil is an integrated producer and that part of the IDC is capitalized
as required. Assume that all of the IDC was incurred on April 1, 20XA.
b. Determine the amount of ordinary income and the amount of any capital gain
assuming an independent producer, percentage depletion of 15%, and that all the
IDC was expensed as incurred. Ignore the 100% and 65% limitations.