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

Exercise 28

Flower Company owns a 100% WI in an unproved property for which it paid $80,000.
The property is burdened with a 1/8 royalty. Flower Company agrees to farm out the
working interest to Barrel Company and retain a 1/7 ORI in return for Barrel Company
agreeing to drill, develop, and operate the property. During 2015, Barrel Company
incurs costs of $200,000 in drilling a well and $100,000 to equip the well. The total
proved reserves are estimated to be 75,000 barrels, and proved developed reserves are
25,000 barrels. Production during 2015 totaled 5,000 barrels, which was sold for $80/
bbl. Ignore severance tax and assume Barrel pays the royalty interest and ORI owners.
a. Give the entries that would be made by Flower Company, assuming it uses the
successful efforts method.
b. Give the entries that would be made by Barrel Company, assuming it uses the
successful efforts method.