On April 1,2016,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 31,2016,25,000 barrels of oil were produced and sold.The amount of depletion expense for 2016 on this well would be:

Question

Quizplus · Accepted Answer

The formula for depletion expense is: (Total cost of acquisition - Residual value) / Total units of capacity * Units of production during the year.

Total cost of acquisition - Residual value = $12,000,000 - $0 = $12,000,000
Total units of capacity = 600,000 barrels
Units of production during the year = 25,000 barrels

Therefore, depletion expense for 2016 would be: 
($12,000,000 / 600,000 barrels) * 25,000 barrels = $500,000

Note that only 500,000 barrels of oil can be profitably extracted, so the total depletion expense would be spread over this amount, not the total estimated amount of barrels. Therefore, the correct answer is B) $600,000.

On April 1,2016,Fossil Energy Company Purchased an Oil Producing Well