WorksheetsChapter 9 - Accounting for Productive Activities
Total questions: 91
Worksheet time: 46mins
Production activities begin:
After a well is drilled but before completion
After a well is completed and flow lines are installed
During the drilling phase
Before acquisition of the lease
Which of the following is NOT a term used for production costs?
Lease Operating Costs
Lifting Costs
Exploration Costs
Production Costs
According to SEC Reg. S-X Rule 4-10(c)(20), production costs:
Are capitalized as assets
Become part of the cost of oil and gas produced
Are recorded as capital expenditures
Are amortized over the lease life
Which of the following is an example of production costs?
Seismic surveys
Lease acquisition costs
Repairs and maintenance of wells
Drilling costs
Production operations cease near:
The wellhead
The point of sale or delivery
The processing plant
The storage facility
Companies typically report production costs as:
Cost of goods sold
Production expense
Capital expenditure
Deferred charges
If all production costs are expensed as incurred:
Inventory is recorded at market value
No inventory is recorded
Inventory is recorded at lower of cost or market
Inventory is capitalized
The traditional accounting treatment for production costs has been to:
Capitalize all costs
Treat all production costs as relating to the accounting period
Defer costs to future periods
Allocate costs over multiple years
In recent years, there has been:
A decrease in recognition of inventories
An increase in recognition of inventories
No change in inventory recognition
Elimination of inventory accounting
Natural gas in a pipeline system at any given time is referred to as:
Pipeline inventory
Fill gas or line fill
Gas reserves
Working gas
Fill gas or line fill is technically:
An expense
A liability
Inventory
Revenue
Some companies treat fill gas as permanent inventory using:
FIFO basis
Average cost basis
LIFO basis
Specific identification
According to the 2011 PricewaterhouseCoopers Survey, what percentage of companies recognize natural gas held in storage as inventory?
47%
45%
28%
52%
Oil is typically:
Stored for long periods before sale
Produced and sold at or near the wellhead
Transported to distant refineries before sale
Held as strategic reserves
Oil accumulation in tanks is typically limited to:
Several weeks' production capacity
Several months' production capacity
A few days' production capacity
One year's production capacity
Producers seek to minimize oil inventory levels because:
Storage is expensive
Oil deteriorates over time
There is no business reason for large stocks
Tax regulations prohibit large inventories
According to the 2011 PricewaterhouseCoopers Survey, what percentage of companies recognize crude oil in lease tanks as inventory?
28%
45%
47%
52%
One common method of assigning costs to inventory involves calculating:
The average cost per well
The cost per barrel of oil equivalent produced
The total lease operating expenses
The market value at year-end
Under the lower-of-cost-or-market method, if net realizable value is higher than historical cost:
Units are valued at net realizable value
Units are valued at historical cost
Units are valued at replacement cost
An adjustment to revenue is made
Changes in inventory using lower-of-cost-or-market are typically recorded as:
An adjustment to revenue
An adjustment to production expense
Unique Oil Company had beginning inventory of 1,500 bbl. at $50/bbl. cost and $75 market, and ending inventory of 1,200 bbl. at $55 cost and $52 market, the net change in inventory is:
Increase of $12,600
Decrease of $12,600
Increase of $15,600
Decrease of $15,600
Companies using successful efforts accounting, accumulate production costs based on:
Country
Individual leases, reservoirs, or fields
Worldwide operations
Geographic regions
Companies using full cost accounting accumulate production costs by:
Individual leases
Fields
Country
Wells
Despite accounting method requirements, companies often allocate costs to individual wells or leases due to:
Accounting standards requirements only
Tax, regulatory, contractual, and management requirements
SEC mandates
Investor demands
Which of the following is a directly attributable production cost?
Field office serving several leases
Salaries of field supervisors overseeing multiple leases
Direct labor for pumpers working on one lease only
Depreciation of gathering systems serving multiple leases
Which of the following is an allocable production cost?
Direct materials identified in invoices
Repairs traceable to individual wells
Property taxes from specific tax receipts
Field offices serving several leases
Common allocation bases include all of the following EXCEPT:
Number of wells
Number of barrels produced
Original acquisition cost
Number of direct labor hours
Paragon Oil Company field office with $10,000 expense, if allocated based on barrels produced on a lease, 2,000 bbl. out of 5,000 total would be charged:
$2,000
$3,000
$4,000
$5,000
Paragon Oil Company field office with $10,000 expense, if allocated based on number of wells on a lease 3 wells out of 10 total would be charged:
$1,000
$2,000
$3,000
$4,000
Labor costs to operate wells include all of the following EXCEPT:
Salaries and wages
Employee benefits
Executive compensation
First-level supervisor costs
Field employees include:
Executive officers
Pumpers, gaugers, and field technicians
Corporate accountants
Legal staff
If a company estimates employee benefits at 45% of direct labor costs, and direct labor costs charged to a lease are $100,000, the total labor charge would be:
$100,000
$145,000
$155,000
$200,000
Normal repair and maintenance costs are:
Always capitalized
Expensed unless they extend useful life or enhance productivity
Amortized over 5 years
Allocated to development costs
Pumping service includes:
Drilling operations
Routine maintenance, meter reading, and gauging operations
Seismic testing
Land acquisition
If workover costs are incurred to stimulate or restore production in the same producing horizon, they should be:
Capitalized as development costs
Deferred and amortized
Expensed as production costs
Recorded as exploration costs
Recompletion is defined as work involving:
Routine maintenance of existing equipment
Deepening a well or plugging back to access proved reserves
Surface repair of flow lines
Regular acidizing treatments
If a recompletion aims to restore or enhance production without increasing proved reserves, the costs should be:
Capitalized
Recorded as an expense
Deferred
Amortized over remaining life
Property taxes on proved properties are:
Exploration costs
Development costs
Production costs
Operating costs
Shut-in payments to royalty owners are normally expensed when:
They are always expensed
They are not recoverable from future production
They exceed $10,000
The well is permanently abandoned
General administrative overhead costs, such as home office expenses:
Are classified as production costs
Are capitalized and amortized
Are expensed as incurred and not classified as production costs
Are allocated to all wells proportionately
Costs for drilling injection wells and purchasing injection equipment are:
Expensed as production costs
Capitalized as development costs
Allocated to exploration
Deferred indefinitely
Development costs for secondary and tertiary recovery systems are amortized using:
Straight-line method
Declining balance method
Unit-of-production method
Sum-of-years-digits method
Routine maintenance and operating costs of secondary recovery systems are:
Capitalized
Considered production costs and expensed as incurred
Amortized over 10 years
Deferred until production begins
For an oil company with $3,000,000 for waterflood system installation and $14,000 for supplies and water, the journal entries would:
Expense all $3,014,000
Capitalize $3,000,000 and expense $14,000
Capitalize all $3,014,000
Expense $3,000,000 and capitalize $14,000
A gathering system begins with:
Processing plants
Pipelines transporting oil and gas from individual wells
Storage tanks
Refineries
Installation costs of a gathering system are classified as:
Production costs
Exploration costs
Development costs subject to DD&A
Operating expenses
Operating costs of gathering systems are:
Capitalized
Classified as production costs and expensed as they occur
Amortized over useful life
Deferred to future periods
Saltwater is typically disposed of by:
Surface evaporation
Reinjecting it back into the formation
Shipping to treatment facilities
Selling to chemical companies
The cost of a saltwater disposal system is:
Expensed immediately
Capitalized and depreciated
Allocated to royalty owners
Shared with government agencies
When a disposal system serves wells producing similar volumes of salt water, allocation is often based on:
Market value of production
Number of wells connected to the system
Distance from disposal site
Age of wells
When wells produce significantly different volumes of salt water, allocation is based on:
Number of wells
Equal distribution
Metered saltwater throughput
Production costs
Tubular goods refer to:
Flow lines and pipelines
Casing and tubing
Storage tanks
Separators and treaters
When a well is initially drilled, the purchase and installation costs of tubular goods are:
Expensed immediately
Capitalized
Allocated over 5 years
Shared with partners
Subsequent repair and replacement of tubular goods are:
Capitalized as assets
Considered production costs and expensed
Amortized over remaining well life
Deferred until well abandonment
For Jerin Oil Company, replacement tubing costing $500,000 plus $10,000 transportation and $90,000 installation should be recorded as:
Capital expenditure of $600,000
Lease operating expense of $600,000
Capital expenditure of $500,000 and expense of $100,000
Expense of $500,000 and capital of $100,000
Severance tax is commonly levied by:
Federal government only
State governments
Local municipalities only
International organizations
Severance taxes are usually calculated as:
A fixed annual fee
A percentage of production costs
A percentage of selling price or quantity sold
A percentage of proved reserves
Severance taxes linked to selling price are recorded:
At the beginning of the year
When the well is completed
When related revenues are recorded
At the end of the fiscal year
Production taxes are:
Uncommon outside the United States
Common outside the United States
Only applied in the United States
Being phased out globally
Production Costs Statements are prepared primarily for:
SEC reporting
Tax authorities
Internal management purposes
Public disclosure
Production Costs Statements are typically prepared:
Annually
Quarterly
Each month for each property
Only when requested
When multiple companies own undivided working interests, they must establish:
A partnership agreement
A joint venture
A merger
A sole proprietorship
The operator in a joint interest operation is usually:
The government regulator
The company with the largest interest
A third-party management company
Rotated annually among partners
The operator bills non-operators for:
Only direct costs
Only indirect costs
Their proportionate share of direct costs plus overhead
An equal share regardless of interest
In deciding whether to complete a well, incremental costs should be compared with:
Past drilling costs
Future net cash flows expected from production
Competitor well costs
Average industry completion costs
Which of the following is NOT a factor in the completion decision?
Quantity of recoverable oil or gas
Future selling price
Sunk costs already incurred
Completion costs
Costs already incurred (sunk costs) are:
The primary factor in the decision
Irrelevant to the decision
A major consideration in future planning
The basis for all financial projections
Reserve recovery timing depends on:
Reservoir characteristics only
Product demand only
Reservoir characteristics, product demand, and government regulations
Company financial position only
Estimating future prices for oil and gas is challenging due to:
Stable supply and demand
Government price controls
Significant influence of supply and demand and unpredictable governmental interventions
Fixed OPEC pricing
Which accounting method requires production costs to become part of the cost of oil and gas produced?
Successful efforts only
Full cost only
Both successful efforts and full cost
Neither method
E&P accounting differs from manufacturing operations because:
E&P companies use simpler accounting methods
E&P companies don't track costs
E&P companies don't track and allocate costs in the same manner as manufacturers
E&P companies use cash basis accounting
The cost of production typically includes all of the following EXCEPT:
Labor
Fuel
Acquisition costs
Repairs
When using lower-of-cost-or-market, if net realizable value is below cost:
Units are valued at historical cost
Units are valued at net realizable value
Units are valued at replacement cost
No adjustment is made
First-level supervisors:
Work only at corporate headquarters
Oversee employees directly employed on a property
Never allocate time to specific leases
Are not included in production costs
Employee benefits are typically estimated as:
A fixed dollar amount per employee
A percentage of direct labor costs
Equal to direct labor costs
Not included in production costs
Materials and supplies for routine repair and maintenance:
Are capitalized as assets
Are classified as production costs
Are considered overhead costs
Are expensed immediately
An oil-gathering system consists of equipment including:
Only pipelines
Oil and gas separators, heater-treaters, and gathering tanks
Only storage tanks
Drilling rigs and equipment
The purpose of reinjecting saltwater is to:
Increase surface water supply
Dispose of waste without harming environment and maintaining reservoir pressures
Create new reservoirs
Reduce operating costs only
The allocation basis when wells produce significantly different volumes depends on:
Equal distribution
Number of wells only
Metered throughput
Random selection
General administrative overhead includes:
Direct field labor
Workover costs
Home office expenses like officers' salaries and legal fees
Severance taxes
The primary focus in oil sales recognition is:
Whether the oil will be sold
When the buyer will take delivery
The price of oil
The quality of oil
The active oil market allows producers to:
Control prices
Determine sales value without physically delivering to a buyer
Avoid paying taxes
Eliminate inventory
Gauging operations involve:
Measuring seismic activity
Measuring the level of oil in a tank
Measuring well depth
Measuring land boundaries
Acidizing is an example of:
Initial well completion
Lease acquisition
Workover operations
Abandonment procedures
When shut-in payments are recoverable from future production, companies record:
An expense
A receivable from the royalty owner
A liability
Revenue
Basic sediment and water (BS&W) is removed:
Before production
During drilling
After production
During transportation
Heater-treaters are part of:
Drilling equipment
Oil-gathering systems
Exploration tools
Seismic equipment
Dehydrators are typically found in:
Oil-gathering systems
Gas-gathering systems
Water injection systems
Drilling operations
The unit-of-production method is used to amortize:
Only exploration costs
Development costs including secondary recovery systems
Only administrative expenses
Royalty payments
When field employees work on multiple leases:
Costs are expensed to corporate overhead
Detailed time sheets should be maintained for allocation
Costs are capitalized
No allocation is necessary
The decision to complete a well should consider all of the following EXCEPT:
Estimated recoverable reserves
Future production costs
Costs already incurred in drilling
Future selling prices
