A company purchases an oil well for $400,000.It estimates that the well contains 500,000 barrels,has a ten-year life,and has no salvage value.If the company extracts and sells 40,000 barrels during the first year,how much depletion expense should be recorded?

Question

Quizplus · Accepted Answer

The depletion expense is calculated by dividing the total cost of the oil well by the estimated number of barrels it contains, then multiplying by the number of barrels extracted in the first year. So, $400,000 / 500,000 barrels = $0.80 per barrel. For 40,000 barrels extracted, the depletion expense is 40,000 barrels * $0.80 = $32,000.

A Company Purchases an Oil Well for $400,000