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 2012 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 2012,how much net income would Yu report in 2012?

Question

Quizplus · Accepted Answer

The revenue from selling 120,000 barrels at $40 per barrel is $4,800,000. The depletion expense is calculated as ($5,000,000 / 500,000 barrels) * 120,000 barrels = $1,200,000. Subtracting the depletion and operating expenses ($1,440,000) from the revenue gives a net income of $2,160,000.

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