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

Question

Quizplus · Accepted Answer

The cost depletion method is used here. The depletion deduction is calculated as: (Cost of property / Total expected barrels) x Barrels sold = ($600,000 / 200,000) x 25,000 = $75,000.

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