Question

Shumway Oil uses successful-efforts accounting and also provides full-cost results as well. Under fullcost, Shumway Oil would have reported retained earnings of \(42 million and net income of \)4 million. Under successful effort, retained earnings were \(29 million, and net income was \)3 million. Explain the difference between full-costing and successful-efforts accounting.

Short answer

Answer

Using full-cost accounting, the cost of unsuccessful ventures, as well as those that are successful, is capitalized; while in successful efforts, accounting capitalizes only those costs related to successful projects.

Step-by-step solution

Meaning of Depletion

Loss of natural resources as a result of access to them on a regular basis is called depletion. A company uses it when any kind of registered asset is involved, such as oil, coal, or gravel deposits.

Explaining the difference between full-costing and successful-efforts accounting.

1. All exploration costs associated with the search for oil and gas are capitalized in full-cost accounting, whereas all exploration costs associated with the discovery of oil and gas are capitalized in successful-effects accounting.
2. When oil and gas are retrieved from wells, the capitalized cost is expensed in the future, but under successful-efforts accounting, all expenditures that do not result in the discovery of oil and gas are expensed in the period incurred.