Question

India company purchased a oil producing well for $12,000,000. the well was expected to produce 500,000 barrels of oil over its useful life. during the current year, the company extracted 60,000 barrels of oil. the oil was sold for $50 per barrel. based on this information, how much net income would india report in the current year? (hint: need to calculate depletion expense)

Answer 1

To calculate the net income, the depletion expense of $24 per barrel is first determined. The total depletion expense for the year is $1,440,000, while sales revenue is $3,000,000. Subtracting depletion from revenue gives a net income of $1,560,000.

Step-by-step explanation:

The company purchased an oil well for $12,000,000 with an expected yield of 500,000 barrels over its useful life. To calculate the net income, we first need to determine the depletion expense.

The depletion expense per barrel is obtained by dividing the cost of the oil well by the expected total production, which is $12,000,000 / 500,000 barrels = $24 per barrel. During the current year, the company extracted 60,000 barrels, hence the total depletion expense for the year is 60,000 barrels * $24/barrel = $1,440,000.

Sales revenue from the oil is calculated by multiplying the number of barrels extracted by the sale price per barrel, which is 60,000 barrels * $50/barrel = $3,000,000. To calculate the net income, we subtract the depletion expense from the sales revenue: $3,000,000 - $1,440,000 = $1,560,000 net income.