Question

Q2-Full Cost Method:

1-1. Timbers Oil Company, LLC (Timbers) is interested in exploring an area near Midland, Texas. Timbers accounts for its costs using the full cost method. It engages an aerial surveying firm to take photos of the region at a cost of $35,000. This results in the following entry?                                                                       Description                                         Account Type                     Debit     Credit                                                                                   

1-2. Timbers then acquires a least to a 120-acre property, which calls for an up-front bonus payment       of $95 per acre. The related journal entry is?                                                                                           

Description                                         Account Type                     Debit     Credit                                                                                   

1-3. Timbers then hires a drilling company to drill an exploratory well at a cost of $550,000. The related journal entry is?                                                                          

Description                                         Account Type                     Debit     Credit                                                                                   

1-4. After the well has been evaluated, it is determined to be a dry hole. The related journal entry is?                                                                                    

Description                                         Account Type                     Debit     Credit                                                                                   

1-5. Following this setback, Timbers instructs the drilling company to drill another exploratory well for $830,000, which is immediately determined to be successful. The resulting journal entry is?                                              Description                                                Account Type                     Debit     Credit

1-6. As the well was deemed successful, the resulting entry of the unproven property is:                                                                               

Description                                         Account Type                     Debit     Credit

1-7. Pleased with the results, Timbers decides to fully develop the property. Timbers engages the drilling company to drill a development well at a cost of $975,000. The related journal entry is?

                                                                Description                                         Account Type                     Debit     Credit                                                                                   

1-8. After an evaluation period, the development well is designated a dry hole. The resulting entry is?                    Description                                         Account Type                     Debit     Credit                                                                                   

1-9. Timbers drills two more wells that prove to be successful. After drilling two successful wells, Timbers spends $500,000 on flow lines, separators, tubing and other production facilities, the resulting journal entry is?                                                                                 

Description                                         Account Type                     Debit     Credit

1-10. Production begin and Timbers incurs monthly production costs of $45,000. The resulting journal entry is?                                                                                

Description                                         Account Type                     Debit     Credit

Answer 1

Note- Full cot method ias a cost accounting method used in oil and gas industry in which all property acquisition, exploration and development cost are aggregated and capitalised irrespective of the outcome of the exploration.

Sl No	Description	Account Type	Debit	Credit
1.1	Preliminary Exploration cost	Geological and Geophysical cost(Capitalised)	$35000
	Bank			$35000
1.2	Leased property Bonuses(120*$95)	Acquisition Cost(Capitalised)	$11400
	Bank			$11400
1-3	Exploratory Well	Exploration cost(Capitalised)	$550000
	Bank			$550000
1-4	Exploartory Dry hole	Exploration cost(Capitalised)	$550000
	Exploratory Well			$550000
1-5	Exploratory Well	Exploration cost(Capitalised)	$830000
	Bank			$830000
1-6	All the cost of the property whether proven or not or whether successful or not will be capitalised
1-7	Development well	Developmetal cost(Capitalised)	$975000
	To Bank			$975000
1-8	Developmet Dry Hole	Developmet cost(Capitalised)	$975000
	Development well
1-9	Production Machinery	Production facility cost(Capitalised)	$500000
	Bank			$500000
1-10	Production Expenses	Production Cost(Expensed)	$45000
	To bank			$45000