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

Exercise 31

Lomax Company assigned 40% of the working interest in an unproved property with a
1/8 royalty interest to Mabel Company in return for Mabel Company bearing all costs
of drilling, developing, and operating the property (until payout). Mabel Company is
entitled to all of the revenue from production until Mabel Company has recovered all
of its costs, at which time the property becomes a joint working interest. Acquisition
costs of the property incurred by Lomax Company were $80,000. Mabel Company
incurs $450,000 in IDC and equipment costs in drilling the well. The well is successful.
Production begins early in the second year, and 9,000 barrels are produced during
each of the first four years of production. The selling price was $80/bbl, and operating
costs were $20/bbl. Determine how much revenue and operating costs each part should
record for the first three years of operations.