Question

Glick Company purchased oil rights on July 1, Year 1 for $2,400,000. A total of 200,000 barrels of oil are expected to be extracted over the assets life, and 30,000 barrels are extracted and sold in Year 1. Which of the following correctly summarizes the effect of the Year 1 depletion expense on the elements of the financial statements?

A. A decrease in assets of $300,000B. A decrease in assets of $360,000C. A decrease in stockholders' equity of $200,000D. An increase in stockholders' equity of $400,000

Answer 1

A decrease in assets of $360,000

Step-by-step explanation:

The applicable method is the unit of the depreciation method. Under this method, the depreciation amount is dependent on usage in a particular period.

The depreciable amount is calculated by dividing the total cost of an asset by expected production to get depreciation per unit.

For Glick. Depreciation per unit will be

=$2,400, 000 / 200,000

=$12 per barrel

In year 1, 30,000 barrels were extracted, the depreciable amount will be

=30,000 x 12

=$360,000

The depreciation amount reduces the book value of an asset by the amount of depreciation.