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(solution) During 2012, The Alberta Oil & Gas Company began an


During 2012, The Alberta Oil & Gas Company began an exploration project in Montana. The

company had paid $500,000 for the drilling rights on a tract of 500 acres of land.

The company then spent another $40,000 building roads and containment ponds. The project

called for 8 exploratory wells to be drilled at an expected cost of $100,000 per well.

The first 6 wells drilled were found to be ?dry? (lacking commercially viable quantities of oil or

gas); however, the last 2 wells drilled contained commercially viable quantities of oil condensate.

Consequently, 2 additional development wells were drilled at a cost of $120,000 per well.

(a) Calculate the capitalized cost of Alberta?s oil reserves under:

1) The full cost method: $____________

2) The successful efforts method $__________


$

$


(b) Which method is the company likely to adopt for income tax reporting purposes?

(Choose 1 or 2)

1) Successful effort method

2) full cost methos

(c) Which method is the company likely to adopt for reporting its financial results to its

shareholders? (Choose 1 or 2)

1) Successful effort method

2) full cost methos

 


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