On April 1, Year 1, Fossil Energy Company purchased an oil-producing well at a cash cost of $12,000,000. It is estimated that the oil well contains 600,000 barrels of oil, of which only 500,000 can be profitably extracted. By December 31, Year 1, 25,000 barrels of oil were produced and sold. The amount of depletion for Year 1 on this well would be:
A) $800,000.
B) $600,000.
C) $480,000.
D) $500,000.

Question

Quizplus · Accepted Answer

Depletion is calculated as the cost of the natural resource (in this case, the oil well) divided by the estimated amount of recoverable units of natural resource (in this case, the 500,000 barrels of oil that can be profitably extracted).

Depletion per barrel = ($12,000,000 / 500,000 barrels) = $24 per barrel

Depletion for the 25,000 barrels produced and sold in Year 1 = 25,000 barrels x $24 per barrel = $600,000.

Therefore, the amount of depletion for Year 1 on this well would be $600,000.

On April 1, Year 1, Fossil Energy Company Purchased an Oil-Producing