On January 1, 2017, Plenty of Oil, Inc. purchased an oil field that is estimated to have 15,000,000 barrels of oil for $45,000,000. In 2017, 1,500,000 barrels of oil were extracted and sold. In 2018, 1,800,000 barrels of oil were extracted and sold. The oil field will have no residual value. What is the book value of the oil reserves that will be reported on the balance sheet as of December 31, 2018?

Question

Quizplus · Accepted Answer

The depletion expense is calculated based on the units of production method. In 2017, 1,500,000 barrels were extracted, and in 2018, 1,800,000 barrels were extracted. The total extracted by the end of 2018 is 3,300,000 barrels. The depletion per barrel is $45,000,000 / 15,000,000 barrels = $3 per barrel. The total depletion expense by the end of 2018 is 3,300,000 barrels * $3 = $9,900,000. The book value is the original cost minus the depletion expense: $45,000,000 - $9,900,000 = $35,100,000.