Question

Carrolton Oil and Gas, an independent oil and gas producer, is approved to use a 20% of gross in-come depletion allowance. The write-off last year was $700,000 on its horizontal directional drill wells. Determine the estimated total reserves in barrels if the volume pumped last year amounted to 1% of the total and the delivered-product price averaged $75 per barrel.

Answer 1

Answer: 5,000,000 barrels

Step-by-step explanation:

First, we need to calculate the last year income which will be:

= $700,000 / 20%

= $700,000 / 0.2

= $3,500,000

Since the average price is $75, the total barrels sold last year was:

= $3,500,000 / 70

= 50,000 barrels

Since it's 1% of the total reserve, then the total reserve will be

= 50,000 / 1%

= 50,000 / 0.01

= 5,000,000 barrels