During 2016,Prospect Oil Corporation incurred $4,000,000 in exploration costs for each of 15 oil wells drilled in 2016.Of the 15 wells drilled,10 were dry holes.Prospect uses the successful efforts method of accounting.Assuming that Prospect depletes 30% of the oil discovered in 2016,what amount of these exploration costs would remain in its 12/31/16 balance sheet?

Question

Quizplus · Accepted Answer

Under the successful efforts method, only successful wells are capitalized and the costs of unsuccessful wells are expensed. Therefore, the total exploration costs capitalized for 2016 would be:

Total exploration costs = 5 wells x $4,000,000 per well = $20,000,000

Since 10 wells were dry holes, the exploration costs associated with these wells would be expensed and would not be included in the balance sheet. The remaining 5 successful wells would be capitalized and depleted over their estimated productive lives. Assuming depletion of 30% of the oil discovered, the remaining exploration costs in the balance sheet would be:

Capitalized costs = 5 wells x $4,000,000 per well x (1 - 0.30 depletion rate) = $14,000,000

During 2016,Prospect Oil Corporation Incurred $4,000,000 in Exploration Costs for Each