During 2013, the Longhorn Oil Company incurred $5,000,000 in exploration costs for each of 20 oil wells drilled in 2013 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 2013, what oil exploration expense would Longhorn charge for this activity in its 2013 income statement?

Question

Quizplus · Accepted Answer

Under the successful efforts method, only the costs associated with successful wells are capitalized. Since 14 out of 20 wells were dry, the costs for these dry wells are expensed. Therefore, the exploration expense is 14 wells x $5,000,000 = $70 million.

During 2013, the Longhorn Oil Company Incurred $5,000,000 in Exploration