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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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(Appendix 10.1) Oil and Gas Accounting Methods Iwata Oil Company incurred costs of $6 million during 2019 by drilling for oil. Half the costs resulted in oil being found, and half resulted in dry wells. Iwata expects the oil wells to produce 10% of their capacity each year from 2020 to 2029.

Required:

  1. 1. What amounts appear in the financial statements for 2020 under:
    1. a. successful-efforts method
    2. b. full-cost method
  2. 2. Next Level What financial statement effects might lead some oil companies, particularly small oil companies, to prefer the full-cost method?

1.a

To determine

State the amount appeared in the financial statements for 2020 under successful-efforts method.

Explanation

Successful-efforts method:

Under successful-efforts method, company capitalizes costs that results in the discovery of oil and gas and amortizes those costs as oil and gas are produced. For example, Company capitalizes costs incurred in the process of drilling for successful wells, whereas it expenses the costs of unsuccessful wells, under the “successful-efforts method” of accounting for oil and gas properties.

  • The “cost of dry wells” amounting to $3,000,000(50%×$6 million) and is expensed during the year 2019

1.b

To determine

State the amount appeared in the financial statements for 2020 under full-cost method.

2.

To determine

State the reason for which the some company’s especially, smaller ones prefer the full-cost method.

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