An oil company purchased 10,000 acres of land on January 1, 2019, for $5,000,000, on which it developed an underground oil site. The company spent $11,000,000 to prepare the site for operation but believes that 500,000 barrels of oil can be extracted from the site over 5 years after drilling begins. The land has a residual value of $250,000. Assuming 50,000 barrels of oil were extracted from the land in 2021, how much depletion would be recorded?

Question

Quizplus · Accepted Answer

The total cost of the oil site is the purchase price plus development costs, or $5,000,000 + $11,000,000 = $16,000,000. Subtracting the residual value of the land, $16,000,000 - $250,000 = $15,750,000, gives the depletable base. Dividing this by the total extractable oil gives the depletion per barrel: $15,750,000 / 500,000 barrels = $31.50 per barrel. For 50,000 barrels extracted in 2021, the depletion expense is 50,000 barrels * $31.50 = $1,575,000.

An Oil Company Purchased 10,000 Acres of Land on January