Question

During 2021, Prospect Oil Corporation incurred $5,000,000 in exploration costs for each of 20 oil wells...

During 2021, Prospect Oil Corporation incurred $5,000,000 in exploration costs for each of 20 oil wells drilled in 2021. Of the 20 wells drilled, 14 were dry holes. Prospect uses the successful efforts method of accounting. Assuming that Prospect depletes 30% of the oil discovered in 2021, what amount of these exploration costs would remain in its 12/31/2021 balance sheet?

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Answer #1

Answer:

Amount of exploration cost would remain in its 12/31/2021 balance sheet is $21 million i.e. $21000000.

Explanation:

Exploration cost = $5000000

Number of oil driled = 20

Total cost = $5000000 x 20 = $100000000 i.e. $100 million

Dry holes = 14

Cost of Dry holes = $100 million x 14/20 = $70 million

Cost of remaining 6 oil driled = $100 million x 6/20 = $30 million

Depletion cost in 2021 = $30 million x 30% = $9 million

Remaining balance of oil driled at December 31 , 2021 = $30 million - $9 million = $21 million.

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