ull Cost versus Successful Efforts Method. During the current year, The Calgary Oil & Gas Company began an exploration project in Montana. The company had paid $1,500,000 for the drilling rights on a tract of 500 acres of land. The company then spent another $180,000 building roads and containment ponds. The project called for eight exploratory wells to be drilled at an expected cost of $130,000 per well. The first eight wells drilled were found to be "dry" (lacking commercially viable quantities of oil or gas); however, both the ninth and tenth wells drilled contained commercially viable quantities of oil condensate. Consequently, two additional development wells were drilled at a cost of $140,000 per well. For income tax reporting purposes, should the company use the full cost method or the successful efforts method? which method should the company use when reporting its financial results to its shareholders? why?
Full Cost versus Successful Efforts Method. During the current year, The Calgary Oil & Gas Company began an exploration project in Montana. The company had paid $1,500,000 for the drilling rights on a tract of 500 acres of land. The company then spent another $180,000 building roads and containment ponds. The project called for eight exploratory wells to be drilled at an expected cost of $130,000 per well. The first eight wells drilled were found to be "dry" (lacking commercially viable quantities of oil or gas); however, both the ninth and tenth wells drilled contained commercially viable quantities of oil condensate. Consequently, two additional development wells were drilled at a cost of $140,000 per well.
For income tax reporting purposes, should the company use the full cost method or the successful efforts method? which method should the company use when reporting its financial results to its shareholders? why?
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