During 2009, the Longhorn Oil Company incurred $5,000,000 in exploration costs for each of 20 oil wells drilled in 2009 in west Texas. Of the 20 wells drilled, 14 were dry holes. Longhorn uses the successful efforts method of accounting. Assuming that none of the oil found is depleted in 2009, what oil exploration expense would Longhorn charge for this activity in its 2009 income statement?

Question

Quizplus · Accepted Answer

Under the successful efforts method of accounting, exploration costs for dry holes must be expensed in the period incurred. Longhorn incurred $5,000,000 in exploration costs for each of the 20 oil wells drilled, which is a total of $100 million. Since 14 of those wells were dry holes, the exploration costs for those wells, $70 million (14/20 x $100 million), must be charged as expenses in the income statement for 2009. Therefore, the correct answer is Choice C: $70 million.

During 2009, the Longhorn Oil Company Incurred $5,000,000 in Exploration