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

Exercise 9

Bingo Oil Company owns 100% of the working interest in a fully developed lease on
which there is a 1/8 royalty interest. The lease has the following capitalized costs and
reserve data as of January 1, 2015: On January 1, 2015, Bingo Oil Company carves out a $500,000 production payment
to Capital Bank. The production payment is payable to Capital Bank out of 60% of
the proceeds of the Bingo's share of production with interest of 10% on the unpaid
balance. During 2015, production totaled 5,000 barrels of oil, production costs were
$20/bbl, and the selling price was $80/bbl. Ignore production taxes and assume Bingo
pays the royalty interest owner.
a. Give all the entries made by Bingo Oil Company (a successful efforts company)
relating to the above lease and to account for the carved-out production payment
during 2015.
b. Give all the entries made by Capital Bank to account for the production payment
during 2015.