The following was published with the financial statements to American Exploration Company.
Property, Plant, and Equipment—The Company accounts for its oil and gas exploration and production activities using the successful efforts method of accounting. Under this method, acquisition costs for proved and unproved properties are capitalized when incurred…. The costs of drilling exploratory wells are capitalized pending determination of whether each well has discovered proved reserves. If proved reserves are not discovered, such drilling costs are charged to expense…. Depletion of the cost of producing oil and gas properties is computed on the unitsof-activity method.
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Write a brief memo to your instructor discussing American Exploration Company’s note regarding property, plant, and equipment. Your memo should address what is meant by the “successful efforts method” and “units-of-activity method.”