Question

Texas Oil Company (TOC) paid $3,000,000 for an oil reserve estimated to hold 50,000 barrels of oil. Oil production is expected to be 10,000 barrels in year 1, 30,000 barrels in year 2, and 10,000 barrels in year 3. TOC expects to begin selling barrels from its oil inventory in year 4.
Required:


Assuming these estimates prove to be accurate, show the balances in the oil reserve, accumulated depletion, and oil inventory accounts in each of the three years.

Year 1 Year 2 Year 3
Oil Reserve
Accumulated Depletion
Oil Reserve, Net
Oil Inventory

Answer 1

Answer: Please see answer below

Explanation:

Oil Reserve $3,000,000 for year 1, 2, 3

Accumulated Depletion

Year 1 = $3,000,000/50,000 X 10,000= $600,000

Year 2 = 3,000,000/50,000 X 30,000+600,000=$2,400,000

Year 3 =3,000,000/50,000 X 10,000+ 2,400,000= $3,000,000

Oil Reserve

Year 1 =$3000000- $600,000=$2,400,000

Year 2, $3,000,000- $2,400,000=$600,000

Year 3= $3,000,000 -$3, 000,000=$0

Net Oil Inventory

Year 1= $600,000

Year 2 $2,400,000

Year 3= $3,000,000

                                          Year 1          Year 2         Year 3

Oil Reserve        $3,000,000          $3,000,000      $3,000,000

Accumulated Depletion $600,000   $2,400,000     $3,000,000

Oil Reserve,               $2,400,000             $600,000         $0

Net Oil Inventory      $600,000        $2,400,000     $3,000,000