Question

Franklin Oil Company has an account titled Oil and Gas Properties. Franklin paid $ 6 comma 500 comma 000 for oil reserves holding an estimated 300 comma 000 barrels of oil. Assume the company paid $ 550 comma 000 for additional geological tests of the property and $ 480 comma 000 to prepare for drilling. During the first​ year, Franklin removed and sold 60 comma 000 barrels of oil. Record all of Franklin​'s ​transactions, including depletion for the first year.

Required:
a. Franklin Oil Company paid $6,300,000 for oil reserves holding an estimated 400,000 barrels of oil. Record the payment for the oil reserves.
b. Assume the company paid $ 560,000 for additional geological tests of the property and $ 440,000 to prepare for drilling. Record the payment for additional geological tests of the property and for preparing the property for drilling.
c. During the first​ year, Franklin removed and sold 65,000 barrels of oil. Record the depletion expense for the first year. ​

Answer 1

Answer: The statement you gave have different question options. I will solve the both of them.Please see explanation column

Step-by-step explanation:

a)Journal to record payment for the oil reserve

Account and particulars Debit Credit

Oil and gas properties $6,500,000

Cash $6,500,000

b)Journal to record payment for additional cost associated with the purchase of oil reserve

Account and particulars Debit Credit

Oil and gas properties $1,030,000

Cash $1,030,000

Calculation

550,000 for additional geological tests of the property + $ 480,000 for drilling =$1,030,000

c))Journal to record depletion expense for oil and gas properties

Account and particulars Debit Credit

Depletion expense $1,506,000

Accumulated depletion $1,506,000

Calculation

Depreciation for a unit = Cost - Residual value/ useful unit

Total cost = Purchase of oil reserve + geological tests +drilling.

= $6,500,000+550,000+$ 480,000= $7,530,000

Depreciation per unit =$7,530,000- $0/300,000 = $25.10per barrel

Depletion expense=

Depreciation for units of barrel sold =Price per barrel x units sold

$25.1 x 60,000 = $1,506,000

Second question

a)Journal to record payment for the oil reserve

Account and particulars Debit Credit

Oil and gas properties $6,300,000

Cash $6,300,000

b)Journal to record payment for additional cost associated with the purchase of oil reserve

Account and particulars Debit Credit

Oil and gas properties $1,000,000

Cash $1,000,000

Calculation

560,000 for additional geological tests of the property + $ 440,000 for drilling =$1,000,000

c))Journal to record depletion expense for oil and gas properties

Account and particulars Debit Credit

Depletion expense $1,186,250

Accumulated depletion $1,186,250

Calculation

Depreciation for a unit = Cost - Residual value/ useful unit

Total cost = Purchase of oil reserve + geological tests +drilling.

= $6,300,000+560,000+$ 440,000= $7,300,000

Depreciation per unit =$7,300,000- $0/400,000 = $18.25 per barrel

Depletion expense=

Depreciation for units of barrel sold =Price per barrel x units sold

$18.25 x 65,000 = $1,186,250