Question

During 2021, the Longhorn Oil Company incurred $5,000,000 in exploration costs for each of 20 oil wells drilled in 2021 in west Texas. Of the 20 wells drilled, 14 were dry holes. Longhorn uses the successful efforts method of accounting. Assuming that none of the oil found is depleted in 2021, what oil exploration expense would Longhorn charge for this activity in its 2021 income statement

Answer 1

Answer:

$70 million

Explanation:

Calculation for what oil exploration expense would Longhorn charge for this activity in its 2021 income statement

First step is to calculate for the actual cost of the exploration cost

5,000,000 of the exploration cost ×20=$100,000,000

Second step

Now let calculate for the amount of the oil exploration expense

Exploration expenses = $100,000,000 × (14/20)

Exploration expense =$100,000,000×0.7

Exploration expenses = $70,000,000

Therefore the amount of the oil exploration expense that Longhorn would charge for this activity in its 2021 income statement will be $70,000,000