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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Depletion of Natural Resources

Brandon Oil Company recently purchased oil and natural gas reserves in a remote part of Alaska for $1,850,000. Brandon spent $10,000,000 preparing the oil for extraction from the ground. Brandon estimates that 108,000,000 barrels of oil will be extracted from the ground. The land has a residual value of $20,000. During 2019, 15,000,000 barrels are extracted from the ground.

Required:

Calculate the amount of depletion taken in 2019. ( Note: Use two decimal points for calculations.)

To determine

As a natural resource is extracted from earth, their cost is appropriated to every unit of natural resource removed. The process of apportioning this cost in each period where natural resource is utilized is known as depletion.

To calculate:

the amount of depletion.

Explanation

Depletion is calculated by a similar method to that of the units-of-production method of depreciation.

Depletion Rate =( Cost- Residual Value)/Recoverable Units

Depletion = Depletion Rate*Units recovered

Cost of asset = $18,50,000+10,000,000

=$11,850,000

Residual Value = $ 20000

Recove...

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