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 five 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 2012,how much depletion would be recorded?

Question

Quizplus · Accepted Answer

The depletion cost per barrel is calculated by subtracting the residual value from the total cost and dividing by the total estimated barrels. Depletion per barrel = ($5,000,000 + $11,000,000 - $250,000) / 500,000 = $31.50. For 50,000 barrels, depletion = 50,000 * $31.50 = $1,575,000.

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