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Q1-Use Successful Effort Method a. Jensen Oil and Gas (Jensen) is interested in exploring an area...

Q1-Use Successful Effort Method

a. Jensen Oil and Gas (Jensen) is interested in exploring an area near Bakersfield, California. Jensen accounts for its costs using the successful efforts method. It engages an aerial surveying firm to                 take photos of the region at a cost of $15,000. This results in the following entry?                                                                                    

Description                                         Account Type                     Debit     Credit                                                                                                                                                   

b. Jensen then acquires a least to a 640-acre property, which calls for an up-front bonus payment of $70 per acre. The related journal entry is?                                                                                       

Description                                         Account Type                     Debit     Credit

                                                               

c. Jensen then hires a drilling company to drill an exploratory well for $650,000. The related journal entry is:                                                                                      

Description                                         Account Type                     Debit     Credit                                                                                                                                                   

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

Description                                         Account Type                     Debit     Credit                                                                                                                                                   

e. Following this setback, Jensen instructs the drilling company to drill another exploratory well for $875,000, which is immediately determined to be successful. The resulting journal entry is?

Description                                         Account Type                     Debit     Credit

f. As the well was deemed successful, the resulting entry of the unproven property is?    

Description                                         Account Type                     Debit     Credit                                                                   

g. Pleased with the results, Jensen decides to fully develop the property. Jensen engages the drilling company to drill a development well at a cost of $1,200,000. The related journal entry is?

Description                                         Account Type                     Debit     Credit                                                                                   

h. After an evaluation period, the development well is designated a dry hole. The resulting entry is?

Description                                         Account Type                     Debit     Credit

                                                                                               

                                                                                               

                                                                                               

i. Jensen drills two more wells that prove to be successful. After drilling two successful wells, Jensen spends $450,000 on flow lines, separators, tubing and other production facilities, the resulting journal entry is?                                                                                     

Description                                         Account Type                     Debit     Credit

j. Productions begin and Jensen incurs monthly production costs of $65,000. The resulting journal entry is?                                                                                         

Description                                         Account Type                     Debit     Credit

Solutions

Expert Solution

Q Description Account Type Debit ($) Credit ($)
a Surveying Cost Expensed off        15,000                  -  
Bank                  -          15,000
Being amount paid for aerial surveying firm to take photos of the region.
b Unaproven Property Capitalised        44,800                  -  
Bank                  -          44,800
Being upfront bonus paid for 640 acres acquired at the rate of $ 70 per acre.
c Drilling in Progress Exploratoy Cost     6,50,000                  -  
Bank                  -       6,50,000
Being hire charges paid for drilling company.
d Dry Hole Expense Expensed off     6,50,000                  -  
Drilling in Progress                  -       6,50,000
Being drilling cost expensed off, since on evaluation it is determined to be dry hole.
e Drilling in Progress Exploratoy Cost     8,75,000                  -  
Bank                  -       8,75,000
Being hire charges paid for drilling .
f Only when it is proven to be successful, cost incurred in Unproven property could be accounted in Proven property.
Since this well has only deemed to be succesful, this does not warrant in transferring the cost from Unproven property.
g Drilling in Progress Development Cost 12,00,000                  -  
Bank                  -   12,00,000
Being hire charges paid for drilling development well.
h Dry Hole Expense Expensed off 20,75,000                  -  
Drilling in Progress Exploratoy Cost                  -       8,75,000
Drilling in Progress Development Cost                  -   12,00,000
Being drilling cost expensed off, as development well has been designated as dry hole.
i Drilling in Progress - IDC Exploratoy Cost 10,00,000                  -  
Drilling in Progress - Equipment Exploratoy Cost     4,50,000                  -  
Bank                  -   14,50,000
Note :Intial Drilling Cost (IDC) assumed as $ 10,00,000.
Being Cost incurred in drilling.
Well & Equipments Capitalised 14,50,000                  -  
Drilling in Progress - IDC                  -   10,00,000
Drilling in Progress - Equipment                  -       4,50,000
Being costs capitalised when wells are proven to be succesful.
Proven Property        44,800                  -  
Unproven Property                  -          44,800
Being upfront bonus paid transferred to Proven property on digging sucessful wells.
j Production Cost Expense        65,000                  -  
Bank                  -          65,000
Being monthly production cost accounted.

ekkarill92 answered 1 year ago
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