Question

X Company acquired land in Costa Rica for a total cost of $45,000,000. Engineers conducted a study at an additional cost of $500,000 to determine that there were oil reserves that should yield approximately 1,000,000 barrels of oil. The purchase agreement includes a requirement that the land be restored when the oil has been extracted, which is expected to cost $1,300,000, after which the land is expected to be worth $4,500,000. In 20X2, X Company incurred $200,000 in development costs and extracted and sold 130,000 barrels of oil. How much depletion will X Company recognize during 20X2

Answer 1

X Company will recognize $819,000 depletion in 20X2.

Step-by-step explanation:

Depletion Expense = (Cost - Salvage Value) × (Period`s Production / Total Expected Production)

= ($45,000,000 + $500,000 + $1,300,000 - $4,500,000) / ( 130,000 / 1,000,000)

= $819,000

Note : Cost of Land Includes Purchase Price and any costs directly incurred in placing the land in condition required for operation by management as well as decommissioning costs.