St Thomas University What Type of Interest Has Juniper Acquired Questions

1. The following costs were incurred by Sunrise Oil and Gas (Sunrise) during the fiscal year ending
March 31, 2019; assume Sunrise uses the full cost method of accounting.
April 1, 2018
G&G Costs……………………………………… $110,000
June 15, 2018
Lease bonus on a 1,000-acre lease………………. $25/Acre
November 1, 2018
Dry-hole costs of an exploratory well…………… $410,000
December 15, 2018 Successful well costs…………………………….. $950,000
January 21, 2019
Cost of production facilities……………………… $390,000
February 28, 2019
Production costs…………………………………. $38,000
REQUIRED:
a. Prepare journal entries for the above transactions.
b. Identify whether the entry is an Asset or Expense account.
2. Marilyn Stone owns the mineral rights to 640 acres in Coleman County, Texas. Marilyn leases
the property to Sunrise Oil & Gas (“Sunrise”) reserving a 1/5 royalty interest. Sunrise drills a
successful well and begins producing oil. Before the first month’s production Sunrise assigns a
5% ORRI to its engineer, Tom Jacobs. In January 2019 Sunrise incurred $45,000 of lease
operating expenses, produced and sold 10,000 BBLs of oil at a price per BBL of $52; the
severance tax is 5%. Sunrise assumes the responsibility of distributing revenue and paying
severance taxes.
REQUIRED (you must show your work):
a. What is the gross revenue to each party?
b. What portion of the tax does each party pay?
c. Record the sale for the working interest owner, royalty interest owner, and ORI owner.
3. Beau Williams owns 160 acres in Coleman County, Texas. On March 1, 2019 Beau Williams
signed a five-year lease agreement with Frost Oil Company (Frost), upon signing the lease Beau
received a one-time payment of $6,400. One year later, March 1, 2020, Frost had not yet drilled a
well, Beau received a payment of $500. On November 30, 2020 Frost drilled a successful well
and Beau started receiving payments of approximately $1,250 a month.
REQUIRED
a. What is the $500 payment called?
b. What is the $1,250 payment called?
c. Is Frost Oil Company required to make another payment on March 1, 2021?
d. Assume, Frost had not begun drilling on March 1, 2020; by what date must drilling
commence to keep the lease from terminating?
e. How many years will the lease continue?
4. Juniper Oil Company incurred the following revenue and costs during 2020.
Acquisition Costs – lease bonus on a 1,500-acre lease…………………. $55/Acre
G&G Costs………………………………………………………………
$75,000
Exploratory dry holes…………………………………………………… $1,200,000
Successful exploratory holes……………………………………………. $450,000
Development wells, dry…………………………………………………. $225,000
Development wells, successful………………………………………….. $525,000
Cost of production facilities……………………………………………… $250,000
Production Costs…………………………………………………………. $75,000
Depreciation, depletion and amortization (DD&A) …………………….. $45,000(SE)
$110,000(FC)
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Accumulated DD&A…………………………………………………….
$175,000(SE)
$350,000(FC)
Revenue from the sale of oil…………………………………………….. $450,000
REQUIRED:
a. Prepare the 2020 income statements for Juniper using the SE and FC method of
accounting.
b. Prepare the 2020 partial balance sheets for Juniper using the SE and FC method of
accounting.
5. Blackstone Oil & Gas Company (Blackstone) owns a 100% working interest in an oil and gas
lease located in Coleman County, Texas. The royalty on the lease is 1/8. Blackstone does not
have the funds to develop the lease and decides to assign the working interest to Juniper Oil
Company (Juniper), reserving an interest that will pay 1/5 of 7/8 of gross revenues, but where
Blackstone will pay none of the operating expenses. Assume in 2020 Juniper produces and sells
10,000 BBLs of oil for total gross revenue of $550,000 and incurs $220,000 in lease operating
expenses.
REQUIRED (where applicable, you must show your work):
a.
b.
c.
d.
What type of interest has Juniper acquired?
What type of interest has Blackstone retained?
What is the gross revenue to each owner?
What portion of the lease operating expenses will each owner pay?
6. Arthur McCord owns 160 mineral acres in Casper, Wyoming. Arthur enters into a 4-year lease
agreement with Windjammer Petroleum reserving 1/4 royalty. In 2019 Windjammer made the
following assignments:
• To Martha Riley (Engineer), an ORRI of 1/8
• To Ben Stevenson, a production payment of 25,000 BBLs of oil to be paid out of the 1/6
of Windjammer’s share of production.
• After considering the above assignments, to Sunrise Oil & Gas Company a joint working
interest of 20%.
REQUIRED (you must show your work):
a. Prepare the decimals interests assigned to each party. For purposes of this exercise
please go out five (5) decimal places when calculating decimal interests
b. Assuming 24,000 gross BBLs oil, calculate the number of barrels each party would
receive.
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