Final answer:
The depletion rate for Worth Company's oil well is $5 per barrel using the units-of-production method. With 100,000 barrels produced in the first year, the accumulated depletion would be $500,000. This amount impacts the company's financial statements by reducing the asset's value and recording an expense.
Step-by-step explanation:
Worth Company recently purchased an oil well for $3.5 million and expects to produce a total of 700,000 barrels of oil over its life. The depreciation method used to allocate the cost of natural resources like oil and gas is called depletion, similar to depreciation for fixed assets. When calculating the depletion rate using the units-of-production method, we divide the total cost by the expected production in units (barrels, in this case).
Calculating the Depletion Rate
Depletion Rate = Total Cost / Total Expected Production
Depletion Rate = $3,500,000 / 700,000 barrels = $5 per barrel
Calculating Accumulated Depletion
Accumulated Depletion = Depletion Rate × Number of Barrels Produced
In its first year, Worth Company produced 100,000 barrels of oil. Therefore, the accumulated depletion balance would be calculated as follows:
Accumulated Depletion = $5 per barrel × 100,000 barrels = $500,000
This means that after the first year, Worth Company would record an accumulated depletion of $500,000 for the 100,000 barrels of oil it produced. This amount would reduce the oil well's book value on the company's balance sheet and would also be an expense on the income statement.