Full-cost and successful efforts methods compared
Response to the following problem:
The Manguino Oil Company incurred exploration costs in 2016 searching and drilling for oil as follows:
Well 101 $ 50,000
Well 102 60,000
Well 103 80,000
Wells 104-108 260,000
Total 5450,000
It was determined that Wells 104-108 were dry holes and were abandoned. Wells 101, 102, and 103 were determined to have sufficient oil reserves to be commercially successful.
Required:
1. Prepare a summary journal entry to record the indicated costs assuming that the company uses the full-cost method of accounting for exploration costs. All of the exploration costs were paid in cash.
2. Prepare a summary journal entry to record the indicated costs assuming that the company uses the successful efforts method of accounting for exploration costs. All of the exploration costs weare paid in cash.