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

Exercise 11

Zink 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, 2017: On January 1, 2017, Zink Company carves out a $400,000 production payment to
Delta Company. The production payment is payable to Delta Company by delivery
of 6,250 barrels out of the first 50% of Zink's share of production. During 2017,
production totaled 4,000 barrels of oil, production costs totaled $50,000, and the
average selling price was $80/bbl. Ignore production taxes and assume Zink pays the
royalty interest owner.
a. Give all the entries made by Zink Company (a successful efforts company) relating
to the above lease and to account for the carved-out production payment during 2017.
b. Give all the entries made by Delta Company (a successful efforts company) to
account for the production payment during 2017.