On March 1, 2016, Anniston Company purchased an oil well at a cost of $1,000,000. It is estimated that 150,000 barrels of oil can be produced over the remaining life of the well and the residual value of the well will be $100,000. During 2016, 15,000 barrels of oil were produced and 10,000 barrels were sold. Which of the following statements is correct with respect to accounting for the well? A- The inventory of oil was $30,000 at December 31, 2016 B- The 2016 cost of goods sold was $90,000 C- The book value of the oil well decreased $60,000 during 2016 D- The cost of goods sold was $30,000
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
On March 1, 2016, Anniston Company purchased an oil well at a cost of $1,000,000. It is estimated that 150,000 barrels of oil can be produced over the remaining life of the well and the residual value of the well will be $100,000. During 2016, 15,000 barrels of oil were produced and 10,000 barrels were sold. Which of the following statements is correct with respect to accounting for the well?
A- The inventory of oil was $30,000 at December 31, 2016
B- The 2016 cost of goods sold was $90,000
C- The book value of the oil well decreased $60,000 during 2016
D- The cost of goods sold was $30,000
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