On March 1, 2016, Anniston Company purchased an oil well at a cost of $1,000,000. It is estimated that 150,000 barrels of oil can be produced over the remaining life of the well and the residual value of the well will be $100,000. During 2016, 15,000 barrels of oil were produced and all of these barrels were sold. Which of the following statements is incorrect with respect to the accounting for the oil well?

Question

Quizplus · Accepted Answer

Since all of the oil produced during 2016 was sold, there should be no inventory of oil at December 31, 2016. Therefore, choice C is the incorrect statement. 
Choice A is correct as the cost of goods sold can be calculated by multiplying the number of barrels sold (15,000) by the depletion rate ($6.00), which equals $90,000.
Choice B is correct as the book value of the oil well decreases by the depletion expense each year. In 2016, the depletion expense can be calculated by multiplying the number of barrels sold (15,000) by the depletion rate ($6.00), which equals $90,000.
Choice D is correct as the depletion rate can be calculated by dividing the cost of the well ($1,000,000 - $100,000 = $900,000) by the estimated number of barrels of oil that can be produced (150,000), which equals $6.00 per barrel of oil.

On March 1, 2016, Anniston Company Purchased an Oil Well