The Fillups Company has been in the business of exploring for oil reserves. During 2013, $10 million was spent drilling wells that were dry holes. Under GAAP, Fillups has the option of accounting for these costs by the successful efforts method or the full-cost method. Under successful efforts, the $10 million would be expensed once it was determined that the wells were dry. Under full cost, the $10 million would be capitalized. It would not be expensed until the oil from successful wells is extracted and sold.
Fillups decides to use the full-cost method because of its positive effect on the bottom line.
- What are the ethical considerations implied in the rationale for Fillups’s decision? Explain.
- Do you believe that an accounting alternative should be selected solely on the basis of financial statement effects? Discuss.
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