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Chapter 9: Q39PGB (page 536)

Donahue Oil Incorporated has an account titled Oil and Gas Properties. Donahue paid \(6,400,000 for oil reserves holding an estimated 400,000 barrels of oil. Assume the company paid \)510,000 for additional geological tests of the property and $470,000 to prepare for drilling. During the first year, Donahue removed and sold 75,000 barrels of oil. Record all of Donahue’s transactions, including depletion for the first year.

Short Answer

Expert verified

Depletion expense for the year: $1,383,750

Step by step solution

01

Journal entry for the acquisition

Date

Particular

Debit

Credit

Jan 1.

Oil and Gas reserve

$ 7,380,000

To Cash

$ 7,380,000

Being oil and gas reserve purchased with additional expense

Working:

Acquisitioncostofreserve=Purchaseprice+Geologicaltest+Drillingexpense=$6,400,000+$510,000+$470,000=$7,380,000

02

Journal entry for depreciation

Date

Particular

Debit

Credit

Dec 31.

Depletion expense - Oil and Gas reserve

$ 1,383,750

To Accumulated depletion – Oil and Gas reserve

$ 1,383,750

Being depletion charged for extraction


Working:

Depletionperbarrel=Cost-ResidualValueEstimatedoilreserve=$7,380,000-$0400,000=$18.45Depletionexpense=Depletionperbarrel×No.ofbarrelsextracted=$18.45×75,000=$1,383,750

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