Question

On april 1, 2016, fossil energy company purchased an oil producing well at a cash cost of $12,000,000. it is estimated that the oil well contains 600,000 barrels of oil, of which only 500,000 can be profitably extracted. by december 31, 2016, 25,000 barrels of oil were produced and sold. the amount of depletion expense for 2016 on this well would be:

Answer 1

$ 12,000,000 / 600,000 barrels of oil = $ 20.00 per barrel.

$ 20.000 x 25,000 barrels = $ 500,000 depletion expense.

$ 500,000 is the cost of the oil well is distributed over only those barrels that can be profitable extracted.