Question

Question 1

Bayou Oil Corporation had the following information and account balances for the years shown relating to Lease No. 1.

	12/31/Y1	12/31/Y2
Proved property – cost …………………………………………..	$ 40,000	$ 40,000
Accumulated DD&A – proved property…………………………	4,000
Wells and equipment – IDC ……………………………………..	400,000	600,000
Accumulated DD&A – wells and equipment – IDC …………….	60,000
Wells and equipment – L&WE…………………………………..	300,000	420,000
Accumulated DD&A – wells and equipment – L&WE………….	45,000

	Year 1	Year 2
Proved reserves, 12/31 - Oil …………………………..	30,000 bbl	50,000 bbl
Gas………………………….	450,000 Mcf		600,000 Mcf
Proved undeveloped reserves, 12/31 - Oil ……………	10,000 bbl	12,000 bbl
Gas……………	200,000 Mcf	120,000 Mcf
Production during 2015 and 2016 - Oil ………………	5,000 bbl	7,000 bbl
Gas………………	50,000 Mcf		70,000 Mcf

REQUIRED: Compute DD&A for the year ended 12/31/Year 2 using:

1. A common unit of measure based on equivalent Mcf
2. Gas as the dominant mineral
3. Same relative Proportion

Answer 1

Firstly, DD&A is Depreciation, Depletion & Amortization, some of the accounting techniques that companies use to gradually expense resources of economic value.

Computation of Depletion:

Depletion expense = Cost - Salvage Value * Nos of units extracted

estimated nos of units

= $40,000 - 0 * 10,000 = $80,000

5,000

Computation of Amortization:

Amortization = Intangible asset costs / estimated useful life

= 5000/2 = 2500