Practice Questions

Practice Questions
Problem-Based Questions
1. Two companies, X and Y, each have net operating income, being revenue less
production costs, of $40 million before exploration expenses. During the year,
each company drills 10 wells at a cost of $5,000,000 each. Company X has three
successful wells and discovers 30 million barrels of oil. Company Y has only one
successful well but discovers 60 million barrels.
You are required to:

Calculate the profit/(loss) for the year for Company X and Company Y using both the
successful efforts and full cost methods.
2. Revenue and costs for Cairn Energy Plc, an Edinburgh based Oil and Gas Exploration
and Production company for the year 2018 are presented below:
Required:
Prepare income statements and unclassified balance sheets for a successful efforts (SE)
company and a full cost (FC) company.
3.
4. The following costs for Davison Lease were all incurred during 2020.
Acquisition costs $ 30,000

Geological and Geophysical (G&G) costs 80,000
Exploratory dry holes 1,500,000
Successful exploratory holes 350,000
Development wells, dry 200,000
Development wells, successful 475,000
Cost of production facilities 250,000
Production costs 60,000
Depreciation, depletion and amortisation (DD&A) 55,000 (SE); 125,000 (FC)
Accumulated DD&A 150,000 (SE); 360,000 (FC)
Revenue from sale of oil 225,000
Required:
Prepare the 2020 income statements and unclassified partial balance sheets for a successful
efforts (SE) company and a full cost (FC) company.
5. XYZ Petroleum Company incurred the following costs during 2020:
February 1 Cost of G&G activities to locate an oil prospect, $100,000

March 2 Acquisition costs for a 400-acre lease: lease bonus $50/acre; other costs
incurred in acquiring the property, $1,000
May 30 Dry-hole costs of an exploratory well, $315,000
June 28 Successful exploratory well costs, $405,000
August 15 Cost of production facilities such as flow lines and separators, $225,000
September 1 Production costs, $50,000
Required:
Prepare journal entries for the above transactions using the successful efforts method
of accounting.
6.
The following costs were incurred by Force Petroleum Company during the fiscal year ending
May 31, 2020
June 4, 2019 Cost of G&G activities to locate an oil prospect, $50,000

August 19, 2019 Acquisition costs for a 1000-acre lease: lease bonus $80/acre;
other costs incurred in acquiring the property, $2,000
December1, 2019 Dry-hole costs of an exploratory well, $400,000
February, 2020 Successful exploratory well costs, $600,000
April 3, 2020 Cost of production facilities such as flow lines and separators,
$500,000
April 30, 2020 Production costs, $40,000
Required:
Prepare journal entries for the above transactions, assuming that Force Petroleum
Company uses the full cost method of accounting.
Multiple Choice Questions
1. _______________________ is a phase in oil and gas project life cycle whose activity
involves confirming the initial exploration results through appraisal wells drilled to gain
further insight into the property, including the size and characteristics of the reservoir.
a. License acquisition
b. Appraisal and evaluation
c. Development
d. Exploration
2. _______________________ is not part of pre-development costs in oil and gas

exploration and production.
a. Production facility costs

b. Exploratory well costs
c. Appraisal drilling costs
d. License acquisition costs
3. The midstream value chain of the oil and gas industry consists activities of:
a. Oil refining and marketing
b. Exploration, development and production
c. Gas distribution
d. Storing, trading, and transporting crude oil and natural gas.
4. Under the SE method, it is usual to use the _________________ as the cost centre,
capitalising all successful costs associated with the ____________________.
a. Block; license area

b. Country; geological region
c. Field; field
d. Well; field
5. Which of the following costs would always be capitalised in accounting for oil and gas
exploration and production activities?
a. Exploration costs
b. Appraisal and evaluation costs
c. Development costs
d. Production costs
6. Which of the following costs would always be charged to expense under the full cost
method?
a. Exploratory dry holes
b. Salary and benefits of a company geologist
c. Salary and benefits of the company Chief Executive Officer (CEO)
d. Production costs
7. The costs associated with Development wells dry will be _____________ under
successful efforts method and ____________________under full cost method.
a. Capitalised; Capitalised
b. Capitalised; Expensed
c. Expensed; Capitalised
d. Expensed; Expensed
8. Successful exploratory wells costs will be _______________________ under successful

efforts method and ______________________ under full cost method.
b. Capitalised; Expensed
c. Expensed; Capitalised
d. Expensed; Expensed
9. The type of asset that would not be depreciated on the basis of their estimated useful life
is
a. Payment of signature bonuses on acquisition of a new exploration license

b. Office buildings
c. Pipeline
d. Wasting natural resources
10. A reserve base that cannot be used for the unit of production calculation is
a. Only proved developed reserves

b. Only probable reserves
c. All proved reserves (both developed and undeveloped)
d. All proved reserves and all or part of probable reserves
11. Support equipment and facilities that service a particular field or other area
constituting a cost centre should be capitalised and depreciated using the
__________________ method over the proved developed reserves of the cost centre.
a. Declining balance
b. Unit of production
c. Straight-line
d. Any reasonable
12. Depreciation is the systematic allocation of the depreciable amount of an asset over its
useful life. In the oil and gas industry, the systematic allocation of the depreciable
amount of a wasting asset is thus referred to as:
a. Depreciation
b. Amortisation
c. Depletion
d. Unit of production basis
13. High costs and high risks have led to many kinds of co-operative arrangements for
exploration and production hydrocarbons. _________________ is type of co-operative
arrangement where reimbursement and remuneration is in kind.
a. Royalty/Tax systems
b. Pure service contracts
c. Production sharing contracts
d. Risk service contracts
14. Proved reserves is defined as
a. Reserves that are expected to be produced from existing wells

b. Reserves that are expected to be produced from new wells
c. Reserves that have at least 50% chance of being technically and economically
producible
d. Reserves that have a 90% chance of being technically and economically
producible
15. _____________________ is not one of the four types of accounting that must be done
by oil and gas exploration and production companies.
a. Costs of goods sold

b. Exploration costs
c. Development costs
d. Production costs
16. A value chain identifies the independent, economically viable segments of an industry, where
value is what customers are willing to pay for. Which of the following segments is not a value
chain in the oil and gas industry?
a. Upstream
b. Oilfield services
c. Midstream
d. Downstream
17. The sector that involves all operations associated with finding and extracting oil and gas
reserves in the oil and gas industry is referred to
a. Oilfield services
b. Refining and marketing
c. Exploration and production
d. Midstream
a. Upstream
c. Midstream
d. Downstream

producible
d. Reserves that have a 90% chance of being technically and economically producible
20. The petroleum fiscal system (or regime) is either
a. Royalty/tax (concessionary) system or contractual-based system

b. Service agreement or production sharing contract
c. Royalty/tax (concessionary) system or production sharing contract
d. Contractual-based system or production sharing contract
21. The oil and gas industry is characterised by a number of unique conditions. These conditions
create an unusual and complex set of rules and practices. Which one of the following is not
part of the unique conditions in the oil and gas industry?
a. Time lag
b. Finite field life
c. Costs unrelated to revenue
d. License acquisition
22. In the oil and gas industry, inherent risks refer to
a. The risks of finding, or not finding, commercially viable oil and gas reserves.
b. Oil price volatility
c. Force majeure risks (natural disaster, civil unrest, terrorism).
d. Political stability of the host country
23. The reserves of oil and gas, which is the underlying resource for generation of income and value
of exploration and production companies, cannot be objectively measured or verified until
production is complete. This is in compliance with the _________________ in accounting.
a. Periodicity concept
b. Matching concept
c. Objectivity concept
d. Conservatism concept
24. A great deal of scope exists for variation in reporting on the financial performance of
companies in the oil industry because oil company accounts are prepared using many different
methods. This makes application of _____________________difficult in the industry.
b. Matching concept
c. Conservatism concept
d. Comparability concept
25. The application of _____________________ in an oil and gas exploration and production
company implies that all of the costs of exploration, appraisal and development must be
accumulated until such times as the revenues are recognised.
b. Matching concept
26. ________________________ means long lead time from initial investment to a positive cash
flow
a. Time lag
b. Periodicity concept
c. Revenue recognition
d. Costs unrelated to revenue

producible

a. Time lag
b. Matching concept
b. Matching concept
b. Matching concept
flow
a. Time lag
a. Oilfield services
b. Refining and marketing
c. Exploration and production
d. Midstream
e. Oilfield services
f. Refining and marketing
g. Exploration and production
h. Midstream
a. Upstream
c. Midstream
d. Downstream

producible

a. Time lag
b. Matching concept
b. Matching concept
b. Matching concept
flow
a. Time lag
46. If reserves do not meet the requirements to be classified as proved developed or proved
undeveloped, they must be classified as:
a. Unproved
b. Contigent reserves
c. Contigent resources
d. Possible reserves
47. Unproved reserves can be subdivided into two categories. These categories are:
a. Proved and probable
b. Probable and possible
c. Behind-the-pipe and shut-in
d. Probable developed and undeveloped
48. Which of the following are defined as exploration costs?
a. Drilling and equipping exploratory wells

b. Drilling exploratory-type stratigraphic test wells
c. Dry-hole contributions
d. Bottom-hole contributions
49. What is the appropriate accounting treatment (under successful efforts) for an
individually insignificant unproved property that is surrendered?
a. The net carrying value of the property is written off to expense.

b. The net carrying value of the property is transferred to the proved property
account.
c. The original cost of the property is written off to expense.
d. The original cost of the property is transferred to the proved property account.
The following information relates to questions 50 to 54:
Successful Efforts Full Cost

Acquisition costs
G&G costs
Exploratory dry holes
Successful exploratory wells
Production facility costs
Indicate whether the above costs should be expensed (E) or capitalised (C) depending
on whether the company uses successful efforts or the full cost method of accounting.
50. In relation acquisition costs, the entries will be:
b. Expensed; Expensed
c. Capitalised; Expensed
d. Expensed; Capitalised
51. G&G costs will be:
52. Exploratory dry holes will be:
53. The entries for successful exploratory wells will be:
54. Production facility costs will be:

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Practice Questions

You are required to:

Acquisition costs $ 30,000

5. XYZ Petroleum Company incurred the following costs during 2020:

February 1 Cost of G&G activities to locate an oil prospect, $100,000

June 4, 2019 Cost of G&G activities to locate an oil prospect, $50,000

2. _______________________ is not part of pre-development costs in oil and gas

a. Production facility costs

a. Block; license area

8. Successful exploratory wells costs will be _______________________ under successful

a. Payment of signature bonuses on acquisition of a new exploration license

a. Only proved developed reserves

14. Proved reserves is defined as

a. Reserves that are expected to be produced from existing wells

a. Costs of goods sold

a. Reserves that are expected to be produced from existing wells

20. The petroleum fiscal system (or regime) is either

a. Royalty/tax (concessionary) system or contractual-based system

22. In the oil and gas industry, inherent risks refer to

27. Proved reserves is defined as

a. Reserves that are expected to be produced from existing wells

28. The petroleum fiscal system (or regime) is either

a. Royalty/tax (concessionary) system or contractual-based system

30. In the oil and gas industry, inherent risks refer to

38. Proved reserves is defined as

a. Reserves that are expected to be produced from existing wells

39. The petroleum fiscal system (or regime) is either

a. Royalty/tax (concessionary) system or contractual-based system

41. In the oil and gas industry, inherent risks refer to

48. Which of the following are defined as exploration costs?

a. Drilling and equipping exploratory wells

a. The net carrying value of the property is written off to expense.

The following information relates to questions 50 to 54:

Successful Efforts Full Cost

51. G&G costs will be:

52. Exploratory dry holes will be:

53. The entries for successful exploratory wells will be:

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