Question

Question 2

For the company below, determine DD&A for Year 3 under successful efforts accounting.

Gusher Oil Company began operations in Year 1 and has acquired only two properties. The two properties, which are both considered significant, are located in different states. Lease B was proved on 1/1/Year 3. Costs incurred from Year 1 through 12/31/Year 3 are as follows:

	Lease A		Lease B		Unallocated
Seismic studies, nondirect……………………………					$70,000
Bonus…………………………………………………	$ 50,000		$ 60,000
Title exams…………………………………………...	10,000		5,000
G&G costs, direct…………………………………….	90,000		80,000
Test-well contributions……………………………….	15,000		18,000
Insurance……………………………………………..	2,000		3,000
Exploratory dry holes – IDC…………………………	220,000		250,000
Exploratory dry holes – L&WE……………………...	30,000		40,000
Exploratory wells-in-progress – IDC………………...	100,000		180,000
Exploratory wells-in-progress – L&WE……………..	22,000		19,000
Wells and equipment – IDC………………………….	-		700,000
Wells and equipment – L&WE ……………………...	-		260,000
Tanks and separators…………………………………	-		110,000
Lease operating costs………………………………...	-		134,000
Total……………………………………………….	$ 539,000		$1,859,000		$70,000

Future development costs	-	$500,000
Proved reserves, 1/1/Year 3	-	600,000 bbl
Proved developed reserves, 1/1/Year 3	-	200,000 bbl
Production during Year 3	-	40,000 bbl

Other information:

The company also owns a building that it purchased 1/1/Year 1 at a cost of $500,000. The building houses the corporate headquarters and has an estimated life of 20 years (ignore salvage). The operations conducted in the building are general in nature and are not directly attributable to any specific exploration, development, or production activities. Since the building is not related to exploration, development, or production, it is depreciated using straight-line depreciation for financial accounting. What is deprecation for Year 3?

Answer 1

Cost of the building - $500,000

Life of the building is 20 years

There is no salvage value

Building is not envolve is development or production.

Hence depreciation in straight line method is = (cost of building - Salvage value)/20 = $500,000/20 = $25,000 per years

Hence depreciation for 3 years = $25,000 x 3 =$75,000.