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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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Most popular questions from this chapter

Alpha Communication purchased equipment on January 1, 2018, for \(27,500. Suppose Alpha Communication sold the equipment for \)20,000 on December 31, 2020. Accumulated Depreciation as of December 31, 2020, was $10,000. Journalize the sale of the equipment, assuming straight-line depreciation was used.

A Recording lump-sum asset purchases, depreciation, and disposals Ellie Johnson Associates surveys American eating habits. The company’s accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated Depreciation account for each depreciable asset. During 2018, Ellie Johnson Associates completed the following transactions:

Jan. 1 Purchased office equipment, \(113,000. Paid \)80,000 cash and financed the remainder with a note payable.

Apr. 1 Acquired land and communication equipment in a lump-sum purchase. Total cost was \(310,000 paid in cash. An independent appraisal valued the land at \)244,125 and the communication equipment at \(81,375.

Sep. 1 Sold a building that cost \)520,000 (accumulated depreciation of \(285,000 through December 31 of the preceding year). Ellie Johnson Associates received \)420,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of \(25,000.

Dec. 31 Recorded depreciation as follows:

Communication equipment is depreciated by the straight-line method over a five-year life with zero residual value.

Office equipment is depreciated using the double-declining-balance method over five years with a \)1,000 residual value.

Record the transactions in the journal of Ellie Johnson Associate

Discarding of a fully depreciated asset On June 15, 2017, Family Furniture discarded equipment that cost \(27,000, a residual value of \)0, and was fully depreciated. Journalize the disposal of the equipment.

Question:Western Bank & Trust purchased land and a building for the lump sum of $3,000,000. To get the maximum tax deduction, Western allocated 90% of the purchase price to the building and only 10% to the land. A more realistic allocation would have been 70% to the building and 30% to the land.

Requirements

1. Explain the tax advantage of allocating too much to the building and too little to the land.

2. Was Western’s allocation ethical? If so, state why. If not, why not? Identify who was harmed.

During 2018, Lora Company completed the following transactions:

Jan. 1 Traded in old office equipment with book value of \(55,000 (cost of\)129,000 and accumulated depreciation of \(74,000) for new equipment.Lora also paid \)55,000 in cash. Fair value of new equipment is \(116,000.Assume the exchange had commercial substance.

Apr. 1 Sold equipment that cost \)12,000 (accumulated depreciation of \(1,000through December 31 of the preceding year). Lora received \)7,100 cashfrom the sale of the equipment. Depreciation is computed on a straightlinebasis. The equipment has a five-year useful life and a residual valueof \(0.

Dec. 31 Recorded depreciation as follows:

Office equipment is depreciated using the double-declining-balancemethod over four years with a \)7,000 residual value.

Record the transactions in the journal of Lora Company.
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