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Chapter 9: Q39PGB_1 (page 536)

Donahue Oil Incorporated has an account titled Oil and Gas Properties. Donahue paid \(6,400,000 for oil reserves holding an estimated 400,000 barrels of oil. Assumethe company paid \)510,000 for additional geological tests of the property and$470,000 to prepare for drilling. During the first year, Donahue removed and sold75,000 barrels of oil. Record all of Donahue’s transactions, including depletion for thefirst year.

Short Answer

Expert verified

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

Step by step solution

01

Meaning of Depletion

Allocating the cost of extracting natural resources over their usage is termed depletion.

02

Showing journal entries

Date

Particulars

Debit($)

Credit ($)

Jan 1

Oil and Gas reserve (refer working note 1)

7,380,000

Cash

7,380,000

(To record purchase of oil and gas reserve )

Dec 31

Depletion expense - Oil & Gas reserve

1,383,750

Accumulated depletion- Oil & Gas reserve

1,383,750

(To record depletion expense)

Working note:

  1. Calculation of purchase price of reserve

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

2. Calculation of Depletion Expense

Depletionperbarrel=Cost−ResidualValueEstimatedOilReserve=$7,380,000−$0400,000=$18.45

DepletionExpense=Depletionperbarrel×No.ofbarrelsextracted=$18.45×75,000=$1,383,750


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