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Petroleum Accounting

CH (3)

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Method to treatment the development fields expenses

1 – all the cost for work in process (drilling - buildings – other expenses..) close in each well as the following entry:          well (1) Dr 

          well (2) Dr 

          well (3) Dr   

           work in process- drilling Cr       work in process- drilling equipment Cr

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2 – To record the costs of the wells are as the following:  A) The cost of non-productive wells and its current expenses so it is closed in income statementThe entry follows:     Dr Income statement           Cr well (1) dry non-productive wells        Cr well (...)

          

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B) The cost of productive wells is the capital expenses and its appear in the balance sheet, which as the following:

    Dr Producing wells     Cr well (1) productive wells

   Cr well (...)        

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Example 1  According to the previous example ,assuming that the well (3) were dry.            Required prepare the journal entries:

       Solution 1 - The closing of work in process                          well (1) 385,000                                            well (2) 250,000               well (3)      360,000                   work in process– drilling 995,000           

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2 - The cost of dry non-productive wells: Income statemet 360,000                                      well (3) 360,000 

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3- The cost of producing wells: wells (1), well (2)

production wells 635,000          well (1) 385,000                                            well (2) 250,000   

       

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The Depletion It is means the decrease of the value of asset

      Such as miners and oil field, the result of the extraction part of the origin or for other reasons       Require the distribution of normal production costs on the productive life of the asset declining

(The amount of Reserve expected to extract).      Note :

The Depletion used for intangible assets.

The Depreciation used for tangible assets.

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Production costs are:

1. The cost of the contract

2. The cost of drilling and preparation

3. The cost of equipment will have depreciation expenses not deplation

The Depletion rate :           = Cost of production (cost of the contract + the cost of drilling and development) /The amount of the reserve is

extracted in the beginning of the year  

Depletion = Depletion rate × amount extracted during the year

  

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  Methods of calculating the Depletion:

1 - First method:          Used in the case of the field was fully developed.   The sense that the cost of the contract and the costs of drilling, including the reserve might be expected from the field.      The rate of depletion of the cost of the field = the cost of field / Reserve                              

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Example

  Applying the first method (the area is fully

developed) in the absence of the Accumulated

of deplation.

       The oil reserves in the first year of production

(c) 1980 by 2400,000 barrels, a production of

150,000 barrels a year, as the cost of the contract,

600,000 R.O, and other production costs (the cost

of drilling and development wells) 300 , 000 R.O

  

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Required

Determine the rate of depletion and depletion expenses

and prepare the necessary journal entries?

1 - The rate of depletion of the contract cost = cost of the

contract /   Reserve is expected in the first year

                           = 600,000/2400,000 = ,025 R.O / barrel.

 2 - The rate of depletion of the cost of drilling = drilling

cost /   Reserve is expected in the first year

                           = 300,000/2,400,000 = ,125 R.O / barrel.

                                        

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3 – Depletion expenses = depletion rate × reserves during the year

depletion expenses of the contract = ,025 × 150,000 = 3750

depletion expenses of the drilling

= ,125× 150,000 = 18750    The total of depletion expenses : =3750 + 18750 =   22500

Or 1 –The depletion rate of the cost of production = cost of production (the cost of the contract + the cost of drilling)                                       Reserve is expected in the first year                            = 600,000 + 300,000/2,400,000

= ,15 R.O / barrel.                                       

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2 - Depletion expenses = depletion the cost of product × reserves mined during the year   installment force = ,15 × 150,000 = 22500

Journal entries:       installment or Operation and production cost 22500   

Accumulated empty wells 22500

        Profit &loss 22500      installment or Operation and production cost 22500  

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Example 3

           Applying the first method (the area is fully

developed) in the case of a compound into force.

      Assuming that found at the end of next year 1981 in

the previous example the estimated reserves will be

3,000,000 barrels, and the amount extracted from the

contract during 1981 was 375,000 barrels, and the

accumulated of depletion 22500, and 60,000 cost of the

contract, the cost of drilling, preparation 300,000 R.O.

               

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Required

Determine the rate of depletion and depletion expenses and prepare the necessary journal entries?

     Solution

      The rate of depletion of the cost of production = cost of production (the cost of the contract + the cost of drilling) – accumulated depletion/               Reserve is expected in the first year +amount of reserve extracted        

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1 - The rate of depletion of the cost of production = cost of production (the cost of the contract + the cost of drilling) – Accumulated /                  

Reserve is expected at the end of year+ the amount of reserve extracted during the year   = 60,000 + 300,000 – 22,500 /300,000+ 375,000

= ,1Real / barrel.

 2 - The depletion expenses = rate of depletion × reserve extracted during the year   depletion expenses = ,1 × 375,000 = 37,500

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Journal entries: depletion expenses 37,500

Accumulated depletion producing wells 37,500        

Income statement 37,500           depletion expenses   37,500

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2 - The second method:

  Used in the case of a partial development of the field.

The rate depletion for the cost of contract in respect of all areas, whether productive or still under development Therefore, the rate  depletion the cost contract = The cost of the contract /  Amount (the reserve) is extracted in the first year of producing wells + reserve expected                               

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The cost of drilling, used just the productive area

So the rate of depletion of the cost of drilling and preparation =    The cost of drilling and preparation /

Reserve might be expected from the first year.

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EXAMPLE 1-The oil reserves in the first year of production 680,000 barrels, a

production of 250,000 barrels a year, as the cost of the contract 60,000 R.O, and other production costs (the cost of drilling and development wells) 300 , 000 R.O

2- Assuming that found at the end of next year in the previous example the estimated reserves will be 5,000,000 barrels, and the amount extracted from the contract during215,000 barrels, and the Accumulated depletion 18500, and 80,000 cost of the contract, the cost of drilling, preparation 250,000 R.O. Required

Determine the rate of  depletion and  depletion expenses and prepare the necessary journal entries?

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REVIEW If (A )petroleum company has got Obtained

a preliminary license for oil exploration in the area of 600 KM, when accessing the company paid a license fee to the Government 9,000 R.O.

What are the probabilities? Estimated that if the accounting found that the

production area = 300 KM and the other not product area and the company will removal

Prepare all journal entries?

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Started a company to prepare the field of oil drilled three wells during the fiscal year amounted to expenses as follows:

500,000 bring the drill expenses. 400,000 removal and installation rig. 20,000 material going out inventory

(well 1, have half and the remaining wells for others equally).

120,000 purchased on the account (the well belonging the first and second equal).

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60,0000 wages of workers digging. 30,000 bonuses to the staff of the

Department. 10,000 administration expenses Note that the well depth of 46,000 feet

first, second and third 25,000 feet 19,000 feet

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Required: 1 – The journal entries. 2 – Ledger account for work under way - digging 3 - Ledger account accounts for the wells (1), (2), (3).

      Note that:   ALL expenses distributed between wells by equally ,expect the salary , bonus, and an administration expenses