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

Exercise 5

The Raupe Lease has the following working interest owners: Reed Corporation 50%,
League Energy 25%, and Sunshine Oil Company 25%. There is a 1/8 royalty on the
lease. On April 1, 2011, Reed Corporation, the operator, receives notice that League
Energy is going nonconsent on the drilling of the Gusher No. 2. Reed Corporation and
Sunshine Oil Company agree to carry League's share proportionately. The nonconsent
penalty is 300%. On August 1, the Gusher No. 2, which was drilled and completed at a
cost of $750,000, goes on production. The production and operating information for
the next few months is as follows: REqUIRED: Assuming severance tax is ignored:
a. Determine Reed Corporation's and Sunshine Oil Company's proportionate shares
of drilling and equipping costs.
b. Prepare a table determining when League Energy will reach payout.
c. Prepare the journal entry that Reed Corporation will make during August to book
its share of production revenue.