Glick Company purchased oil rights on July 1,Year 1 for $2,400,000.A total of 200,000 barrels of oil are expected to be extracted over the assets life,and 30,000 barrels are extracted and sold in Year 1.Which of the following correctly summarizes the effect of the Year 1 depletion expense on the elements of the financial statements?

Question

Quizplus · Accepted Answer

Depletion rate = $2,400,000 ÷ 200,000 barrels = $12 per barrel
Year 1 Depletion expense =;$12 × 30,000 barrels = $360,000
Recognizing depletion decreases assets (oil rights)and stockholders' equity (retained earnings)by $360,000.It also increases expenses,which decreases net income by the same amount.

Glick Company Purchased Oil Rights on July 1,Year 1 for $2,400,000.A