An oil company purchased 10,000 acres of land on January 1, 2011, 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 2013, how much depletion would be recorded?

Question

Quizplus · Accepted Answer

Depletion is calculated using the formula:

Depletion per unit = (Cost of natural resource - Residual value) / Estimated total units of natural resource

Total depletion = Depletion per unit x Units extracted

First, we need to calculate the depletion rate per barrel of oil:

Depletion per barrel = ($11,000,000 - $250,000) / 500,000 barrels = $21.50 per barrel

Now, we can calculate the depletion for the 50,000 barrels extracted in 2013:

Depletion expense = Depletion per barrel x Barrels extracted = $21.50 x 50,000 = $1,075,000

Therefore, the answer is B) $1,575,000.

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