A company purchased an oil well for $10 million.It is estimated that 5 million barrels can be extracted from the well.Determine depletion expense assuming 4 million barrels are extracted and sold during the year.
A) $1,250,000
B) $8,000,000
C) $12,500,000
D) $8,750,000

Question

Quizplus · Accepted Answer

The depletion expense is calculated based on the number of units extracted. The cost per barrel is $10 million / 5 million barrels = $2 per barrel. For 4 million barrels extracted, the depletion expense is 4 million barrels * $2/barrel = $8 million.

A Company Purchased an Oil Well for $10 Million