Question

Fitzgerald Oil and Gas incurred costs of $8.25 million for the acquisition and development of a natural gas deposit. The company expects to extract 3 million cubic feet of natural gas during a four-year period. Natural gas extracted during years 1 and 2 were 700,000 and 800,000 cubic feet, respectively. What was the depletion for year 1 and year 2?

Answer 1

Answer:

Depletion for Year 1: $1,925,000;

Depletion for Year 2: $2,200,000.

Explanation:

Please find the below for detailed explanation and calculation:

- First, calculate the depletion rate per cubic feet of natural gas extracted from the gas deposit:

+Depletion rate = Total cost of acquisition and development of the gas deposit/ total expected gas extraction from the deposit = 8,250,000/3,000,000 = $2.75 per cubic feet.

- Then, find the depletion for the year 1 and yer 2 given the actual extracted gas are given:

Depletion for year one = Depletion rate x actual gas extraction in year 1 = 2.75 x 700,000 = $1,925,000;

Depletion for year two = Depletion rate x actual gas extraction in year 2 = 2.75 x 800,000 = $2,200,000..

Hope you find the explanation helpful.