Yu Company purchased a producing oil well for $5,000,000. The well was expected to produce 500,000 barrels of oil over its useful life. During 2014 the company extracted 120,000 barrels of oil. The oil was sold for $40 per barrel. Assuming that the company incurred $1,440,000 in operating expenses other than depletion during 2014, how much net income would Yu report in 2014?

Question

Quizplus · Accepted Answer

Net income is calculated as total revenue minus total expenses. Revenue from selling 120,000 barrels at $40 each is $4,800,000. Depletion expense is ($5,000,000 / 500,000 barrels) * 120,000 barrels = $1,200,000. Total expenses are $1,440,000 (operating) + $1,200,000 (depletion) = $2,640,000. Net income is $4,800,000 - $2,640,000 = $2,160,000.

Yu Company Purchased a Producing Oil Well for $5,000,000