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

Exercise 30

French Company signed a lease agreement with Rita Mack covering 900 acres in
Oklahoma. Ms. Mack received a bonus of $50,000 and a 1/5 royalty interest, and
French Company received 100% of the working interest.
On 1/1/2018, French Company enters into an agreement with Donald Oil Company
wherein French Company assigns its working interest and retains a 1/4 ORI. Donald
agrees to pay all of the cost to drill a well on the property. If the well is successful,
Donald Oil Company will pay all of the operating costs and retain the net profit (after
payment of the royalty, ORI, and operating expenses) until it has recovered the cost of
drilling and completing the well. At that point, French Company's ORI will revert to a
45% WI. Donald pays the royalty interest and ORI owners.
During November 2018, Donald Oil Company drills Well No. 1 at a cost of $210,000.
The well is successful. Estimated proved reserves total 100,000 barrels, and proved
developed reserves are 50,000 barrels. During 2019 and 2020, 3,750 bbl/year are
produced and sold for $80/bbl. Operating costs are $20/bbl. Ignore severance tax and
assume reserve estimates do not change.
Compute payout. Prepare all of the entries that would be made by both French
Company and Donald Oil Company during 2018, 2019, and 2020, assuming both
companies are successful efforts companies.