Oil and Gas Accounting Test
Oil and Gas Accounting Test

Oil and Gas Accounting Test

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  • Pages: 6 (3107 words)
  • Published: December 24, 2017
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Operations Pre-license prospecting Geological evaluation of relatively large areas Mineral right acquisition/contracting Activities related to obtaining from the mineral rights owner the legal rights to explore, develop and produce OLL In a particular area Production sharing contracts- arrangement by which companies obtain rights from the government to explore, develop and produce Exploration Evaluation and appraisal Development Drilling additional wells necessary to produce the commercial reserves, constructing platforms and gas treatment plants, constructing equipment and facilities necessary or getting the oil to the gas for processing and constructing pipelines. Production Extraction and treatment. Closure CHAPTER 4 Pre-license prospecting and nondrying exploration Identifying areas that may contain oil and gas reserves US Successful efforts- G&G costs expensed as Incurred Entry: Db Expense cry cash (before or after license calculation) overhead costs with G&G activities Successful efforts- expensed as incurred.

Successful Efforts Geological and Geophysical costs must be expensed as incurred. Doesn’t matter if costs are Incurred before or after the license Is acquired.

G costs and contract counting If operation is conducted under Lease or concession agreement, it is unlikely that the contract would contain provisions that would permit cost recovery of these costs If the operation Is conducted under a SC or risk service agreement, the contractor may be permitted to recover G related expenditures incurred after license acquisition and possibly G costs Incurred before license acquisition Support equipment and faceless depreciation or operating costs become an exploration, development or production cost, as appropriate. Entries: Db G expense -depreciation Cry Accumulated Depreciat

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ion Db G expense-operating costs Cry Cash Reprocessing Seismic How to account for cost of re-evaluation or reprocessing of the data? If the reprocessing relates to the search for oil then it should be accounted for according to SE provisions regarding prospecting and nondrying exploration costs. If the purpose is to determine how best to develop the reserves in the field, then they should be capitalized as development costs.

License acquisition costs Costs of evaluating business environment, signature bonus, negotiating, etc should be capitalized Entry: Db Intangible assets-unproved property Cry Cash Development and production bonuses If the payment is actually a deferred signing bonus, the appropriate accounting treatment is to capitalize the development bonus as a license acquisition cost.

Accrue once the operations are apparently proceeding to the development phase. Entries: To record signature bonus: Db Intangible Assets – unproved property Cry Cash To transfer unproved property costs to proved due to commercial discovery: Db Proved property Cry unproved property To record accrual of production bonus: Proved property Cry production bonus payable To record payment of production bonus: Db

Production bonus payable Cry Cash Internal costs relating to acquisition Can allocate capitalized costs to individual licenses acquired, on an acreage basis or an a potential licenses basis Costs of carrying and retaining unproved properties Costs relating to maintaining unproved properties be charged to expense as incurred Ex: delay rentals paid on lease mineral properties until specified work is commenced, property taxes, accounting costs, legal costs Impairment of unproved property Impairment has occurred if there is some indication that the capitalized cost of an unproved property is greater than th

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future economic benefits expected to be derived from the property. Under SE, loss should be realized. Negative G data and dry holes would typically suggest that part of the property’s historical cost has expired and impairment should be recognized Db Impairment expense Cry Allowance for impairment FAST permits impairment of individually insignificant properties on a group basis.

Apply the impairment percentage to the total cost of the group of individually Insignificant unproved properties. This determines the desired balance in the allowance for impairment account. Next the difference between the current balance and the desired balance is recognized as impairment expense.

Entry: Impairment Expense Cry Allowance for impairment, group basis Abandonment of unproved property Full abandonment: When an individually significant license area is abandoned, its net capitalized acquisition costs should be charged to surrender and abandonment expense Ex: Db Surrender and abandonment expense (equal to acquisition cost) Db Allowance for impairment (balance) Cry unproved property Partial Abandonment or Relinquishment the future economic benefit of the property, then the entire property should be seeded for additional impairment. Unproved property classification An unproved property should be reclassified too proved property status if and when commercial reserves are discovered on the property. Ex: Db Tangible Assets- proved property (acquisition costs) Db Impairment Allowance (balance) Cry In tangible assets- unproved property Sales of unproved property If the property was individually significant, a gain or loss should be recognized on the sale.

Ex: Db Cash (sale price) Db allowance for impairment (balance) Db/Cry(gain or loss) Cry unproved property If the property was individually insignificant, a gain would be recognized only if the selling price exceeds the original cost of the property. Loss recognition is not allowed. CHAPTER 5 Accounting for Exploratory Drilling and Appraisal Costs Under SE, general nondrying exploratory costs are to be charged to expense as incurred; exploratory drilling type costs are initially capitalized. Exploratory Well- Nell drilled to find and produce oil or gas in an unproved area to find a new reservoir in a another reservoir or to extend a known reservoir.

Stereographic test well- drilling effort to obtain information pertaining to a specific geological condition.

Exploratory type” if drilled in a proved area, “development type” if drilled in a proved area. Exploration well- well drilled to discover whether oil or gas exists in a previously unproved geological structure Appraisal well- well drill to determine the size, characteristics, and commercial potential of a reservoir by digging an exploratory Nell. Classifying Drilling costs Separate intangible drilling costs (DC) from equipment costs. DC deducted in year incurred for US tax law. Equipment costs may be depreciated over 7-10 years.

Besides tax purposes, distinction has no significance Targeted Depth

En evaluating after drilling : if commercial reserves have been discovered, the drilling in progress account balances are transferred to another type of asset account that will be subject to depreciation The first successful exploratory well’s cost will be reclassified from an unproved to a proved property account If well is unsuccessful, plug and abandon hole and charges these costs to dry hole expense, net any equipment salvaged from well. If the license area is also

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