Question

Glick Company purchased oil rights on July 1, Year 1 for $2,400,000. If 200,000 barrels of oil are expected to be extracted over the asset's life, and 30,000 barrels are extracted and sold in Year 1, the recognition of depletion expense on December 31, Year 1 would cause: Multiple Choice
a reduction in equity of $200,000.
a reduction in assets of $360,000
a reduction in assets of $300,000
an increase in equity of $400,000.

Answer 1

Answer:

$360,000

Explanation:

The computation of the recognition of depletion expense is shown below:-

The balance of $2,400,000 will be capitalized as an intangible asset at the time of acquisition of Oil rights. The reduction in value of this right would be expensed per year at a rate of $12 per barrel and the intangible value of the commodity would be decreased to the same degree.

The depletion or reduction in asset value = Extracted Barrels × Rate per Barrel

= 30,000 × $12

= $360,000