The treatment of fixed asset accounting also includes accounting for mineral reserves, such as oil and gas, coal, gold, diamonds, and silver. These costs must be capitalized and depleted over the estimated useful life of the asset. The depletion method used is the units of production method. An example of a source document for an oil and gas exploration firm is presented in the figure for Problem 11. The time to drill a well from start to completion may vary from 3 to 18 months, depending on the location. Further, the costs to drill two or more wells may be difficult to separate. For example, the second well may be easier to drill because more is known about the conditions of the field or reservoir, and the second well may be drilled to help extract the same reserves more quickly or efficiently. Solving this problem may require additional research beyond the readings in the chapter.
a. The source documents for the fixed asset accounting system come from the receiving department and the accounts payable department. For an oil and gas firm, from where would you expect the source documents come?
b. Assume that a second well is drilled to help extract the reserves from the field. How would you allocate the drilling costs?
c. The number of reserves to be extracted is an estimate. These estimates are constantly being revised.
How does this affect the fixed asset department’s job? In what way, if at all, does need to be altered to reflect these adjustments?
d. How does the auditor verify the numbers that the fixed asset department calculates at the end of the period?