On April 1, 2014, Marlin Company purchased a producing oil well at a cash cost of $3,500,000. It is estimated that 500,000 barrels of oil can be produced over the remaining life of the well. By December 31, 2014, 25,000 barrels of oil had been produced and sold. The amount of depletion expense on this well for 2014 would be:

Question

Quizplus · Accepted Answer

Depletion expense is calculated based on the number of units of resource extracted, multiplied by the cost of the resource.

The depletion rate per barrel of oil is calculated as:

Depletion rate = Cost of oil well / Total estimated barrels of oil = $3,500,000 / 500,000 = $7 per barrel

Therefore, the depletion expense for the year 2014 would be:

Depletion expense = Depletion rate per barrel x Number of barrels produced and sold

Depletion expense = $7 x 25,000 = $175,000

Hence, the correct answer is choice (C), $175,000.

On April 1, 2014, Marlin Company Purchased a Producing Oil