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Chapter 9: Q9-4TI (page 512)

Amplify Petroleum holds huge reserves of oil. Assume that at the end of 2017, Amplify Petroleum’s cost of oil reserves totaled $80,000,000, representing 100,000,000 barrels of oil. Suppose Amplify Petroleum removed and sold 20,000,000 barrels of oil during 2018. Journalize depletion expense for 2018.

Short Answer

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Answer

Depreciation Expense of Oil Reserves is debited by $16,000,000 and Accumulated Depreciation is also credited by $16,000,000.

Step by step solution

01

Showing Journal EntryStep 1: Showing Journal Entry

Date

Accounts

Debit ($)

Credit ($)

Depletion Expense-Oil Reserves

16,000,000


Accumulated Depreciation-Oil Reserves


16,000,000



02

Calculation of Depletion Expense

Depletion=CostResidualValueEstimatedtotalunits=80,000,000-$0100,000,000barrels=$0.8perbarrel

DepletionExpence=Depletionperunit×Numberofunitsextracted=$0.8×20,000,000barrels=$16,000,000year1

Depletion means the allocation of the cost of Natural resources that are extracted from the Earth. Examples of natural resources are Diamond, oil, Timber, etc.

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