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

Exercise 7

Wildcat Oil Company leased undeveloped acreage from David Jones for $30,000, with
Jones receiving a 1/8 royalty interest. Financially unable to develop the lease, Wildcat
enters into a farm-in/farm-out agreement with Jayhawk Company. Jayhawk agrees
to drill and complete a well in return for 60% of the working interest and the right to
recover all of its costs. Jayhawk drills and completes the well for $100,000. Estimated
proved reserves are 125,000 barrels, and proved developed reserves are 25,000 barrels.
Jayhawk is the operator, and production totals 1,000 bbl/month for the first six months.
Assume that the average selling price is $80/bbl, and lifting costs average $20/bbl.
Ignore severance taxes and assume reserve estimates do not change. Jayhawk assumes
the responsibility of paying the royalty interest.
a. Calculate payout.
b. Assuming that both companies are successful efforts companies, give all of the
entries, including monthly DD&A expense for the first three months, that would be
made by Wildcat Oil Company and by Jayhawk Company.