Question

An oil company purchased 10,000 acres of land on January 1, 2015, for $5,000,000, on which it developed an underground oil site. The company spent $11,000,000 to prepare the site for operation, and believes that 500,000 barrels of oil can be extracted from the site over 5 years after drilling begins. The land has a residual value of $250,000. Assuming 50,000 barrels of oil were extracted from the land in 2017, how much depletion would be recorded

Answer 1

the depletion would be recorded is $1,575,000

Step-by-step explanation:

The computation of the depletion would be recorded is shown below;

Cost of land $5,000,000

Investment on land $1,100,0000

Less: Residual value -$250,000

Depreciable value $15,750,000

Now the depletion should be

= ($15,750,000 ÷ 500,000) × 50,000

= $1,575,000

Hence, the depletion would be recorded is $1,575,000