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

Exercise 21

The following transactions occurred during 2018:
a. Joyner Oil Company and Brown Oil Company jointly purchased a 2,000 acre lease
in Oklahoma for $60,000. Joyner has a 60% WI, and Brown, a 40% WI. Joyner will
be the operator of the lease.
b. Rayburn Oil Company owns 100% WI in a lease (with a 1/6 royalty interest) with
capitalized costs of $600,000. Rayburn assigns the working interest to Fugate Oil
for $800,000 and keeps a 15% overriding royalty interest.
c. Rayburn Oil Company owns 100% WI in a lease (with a 1/6 royalty interest)
in Oklahoma and transfers a 1/16 overriding royalty interest to the controller
of the company.
d. Sells Oil Company owns the working interest in a lease in Nueces County, Texas
and assigns 40% of the working interest to the Knight Oil Company in return for
Knight drilling and equipping a well on the property. After the well is completed,
Sells and Knight will share revenues and costs.
e. Knight Oil Company assigns the working interest in Lease A to Sells Oil Company
for $700,000, and in return, Knight will receive 20,000 barrels of oil from the first
30% of Sells' production.
f. Sells Oil Company sells a production payment interest of 20,000 barrels of oil for
$300,000, which is to be paid from the first 30% of production.
g. Cantu Oil Company owns a working interest in Harris County, Texas. Cantu
transfers 60% of the working interest to Stephens Oil Company in exchange for
Stephens bearing all costs of drilling, completing, and operating the property until
payout. Stephens Oil Company will receive 100% of the working interest's share of
revenue until drilling and developing costs have been recovered, at which time the
property will be operated as a joint property.
REqUIRED: Identify the following types of interests created by the 2018
transactions. If the interest is an overriding royalty or a production payment
interest, also state whether it is a retained or carved-out interest.