During 2013, Prospect Oil Corporation incurred $4,000,000 in exploration costs for each of 15 oil wells drilled in 2013. 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 2013, what amount of these exploration costs would remain in its 12/31/13 balance sheet?

Question

Quizplus · Accepted Answer

Out of the 15 oil wells drilled, only 5 were successful. Therefore, the total exploration cost for successful wells is $4,000,000 x 5 = $20,000,000.

Since Prospect depletes 30% of the oil discovered, only 70% of the cost is capitalized. Therefore, the total capitalized cost is $20,000,000 x 70% = $14,000,000.

This amount would remain on the balance sheet at 12/31/13. Therefore, the correct answer is B) $14 million.

During 2013, Prospect Oil Corporation Incurred $4,000,000 in Exploration Costs