Problem:
The Fillups Company has been in the business of exploring for oil reserves. During 19x1, $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.
Q1. What are the ethical considerations implied in the rationale for Fillups decision? Explain.
Q2. Do you believe that an accounting alternative should be selected solely on the basis of financial statement effects? Discuss.