Jimmy acquires an oil and gas property interest for $600,000.Jimmy expects to recover 200,000 barrels of oil.Intangible drilling and development costs are $160,000 and are charged to expense.Other expenses are $40,000.During the year,25,000 barrels of oil are sold for $800,000.Jimmy's depletion deduction is
A)$120,000.
B)$75,000.
C)$160,000.
D)$600,000.

Question

Quizplus · Accepted Answer

The cost depletion method is used here. The cost per barrel is $600,000/200,000 barrels = $3 per barrel. For 25,000 barrels sold, the depletion deduction is 25,000 barrels x $3 = $75,000.

Jimmy Acquires an Oil and Gas Property Interest for $600,000