Question

Brandon Oil Company recently purchased oil and natural gas reserves in a remote part of Alaska for $800,000. Brandon spent $10,000,000 preparing the oil for extraction from the ground. Brandon estimates that 120,000,000 barrels of oil will be extracted from the ground. The land has a residual value of $20,000. During 2019, 14,990,000 barrels are extracted from the ground. Required: Calculate the amount of depletion taken in 2019. (Note: In your calculations, round depletion per barrel to two decimal places.)

Answer 1

Answer: $1,349,100

Explanation:

The depletion per barrel will be calculated as:

= (Total cost of reserve - Residual value) / Estimated barrels of oil

Total cost of reserve will be:

= $800,000 + $10,000,000

= $10,800,000

Then, the depletion per barrel will be:

= ($10,800,000 - $20000) / 120,000,000

= $10,780,000 / 120,000,000

= $0.09 per barrel

Depletion for 2019 will be:

= Depletion per barrel × barrels extracted

= $0.09 × 14,990,000 barrels

= $1,349,100