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

Exercise 29

Wildcat Oil Company acquired an undeveloped lease for which it paid $30,000. The
lease is burdened with a 1/8 royalty. Financially unable to develop the lease, Wildcat
sold 60% of its working interest to two parties for $200,000 ($100,000 each), agreeing to
use the money to drill and equip a well. When the well is completed, each of the three
companies will share future development and operating costs. The well cost $200,000
and was successful. Estimated proved reserves were 125,000 barrels, and proved
developed reserves were 87,500 barrels (12/31). Wildcat is the operator, and 2,500
barrels were produced and sold in the first year of operations. The selling price was $80/
bbl, operating costs were $20/bbl, and the severance tax rate was 5%. The purchaser
assumed the responsibility of paying severance taxes and the royalty interest owner.
a. Determine how much revenue and operating costs each party should record for the
first year of operations assuming successful efforts companies.
b. Give all entries necessary for Wildcat Oil Company and the buyers.
c. Give the entries assuming Wildcat Oil Company is a full cost company.