During 2018, Prospect Oil Corporation incurred $3,300,000 in exploration costs for each of 20 oil wells drilled in 2018. Of the 20 wells drilled, 11 were dry holes. Prospect uses the successful efforts method of accounting. Assuming that Prospect depletes 25% of the oil discovered in 2018, what amount of these exploration costs would remain in its 12/31/2018 balance sheet?
Multiple Choice
$16.67 million.
$22.27 million.
$29.70 million.
$37.47 million.
what amount of these exploration costs would remain in its 12/31/2018 balance sheet?
Ans: $22.27 million.
Explanation:
1) Wells that are not dry holes:
Wells that are not dry hole:
= 20 - 11
= 9 hole
2) Capitalize the wells that are not dry holes:
= 9 holes × 3.3 mn each hole
= $ 29.7 mn
3) Of this, 25% is depleted in 2018 and the rest remains on the balance sheet.
= $ 29.7 ×25%
= $ 7.425 mn
4) Remaining 75% ( 1- 25%) balance in its 12/31/ 2018 balance sheet.
= $ 29.7 - $ 7.43
= $ 22.27 million
During 2018, Prospect Oil Corporation incurred $3,300,000 in exploration costs for each of 20 oil wells...
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