Reference no: EM132465131

Lil Oil Company, a successful efforts company, has a WI in Lease X with the following costs and reserves as of January 1, 20X1.

 IDC & LWE                                                                     Proved Property

Asset  $500,000                                                             $100,000

Accumulated DD&A (200,000)                                            (40,000)

Net Carrying Value $300,000                                               $60,000

Estimated proved reserves 1/1/20X1                          220,000 bbls

Estimated proved developed reserves 1/1/20X1          140,000 bbls

No additional drilling occurred during the year.

Question (a) During the first quarter of 20X1, production was 20,000 bbls. Compute DD&A expense for the first quarter of 20X1.

Question (b) On June 30, 20X1, a new reserve report estimated the following reserves as of June 30, 20X1

1. Proved reserves                 250,000 bbls
2. Proved developed reserves   150,000 bbls

Question (c) Production for the second quarter of 20X1 was 25,000 bbls. Compute DD&A expense for the second quarter of 20X1 assuming that Lil Oil Company uses the new reserve report to compute DD&A expense for the entire second quarter.

Question (d) Under the Entire Quarter Method of calculating DD&A in a quarter with a reserve revision, (1) discuss the impact to net income in a year with an upward revision in the reserves estimate, and (2) discuss the impact of a net income in future years assuming no additional revisions.