During 2018, Prospect Oil Corporation incurred $4,000,000 in exploration costs for each of 15 oil wells drilled in 2018. 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 2018, what amount of these exploration costs would remain in its 12/31/2018 balance sheet?

Question

Quizplus · Accepted Answer

Capitalize the wells that are not dry holes: 5 × $4 million = $20 million. Of this, 30% is depleted in 2018 and the rest remains on the balance sheet.
Therefore, 70% of $20 million remains = $14 million.

During 2018, Prospect Oil Corporation Incurred $4,000,000 in Exploration Costs