Chapman Oil, Inc. has an account titled Oil and Gas Properties. Chapman paid $6,300,000 for oil reserves holding an estimated 400,000 barrels of oil. Assume the company paid $560,000 for additional geological tests of the property and $440,000 to prepare for drilling. During the first year, Chapman removed and sold 65,000 barrels of oil. Record all of Chapman’s transactions, including depletion for the first year.
SOLUTION
Purchase price of oil reserves | $ 6,300,000 | |
---|---|---|
Add related costs: | ||
Geological tests | $ 560,000 | |
Drilling preparation | 440,000 | 1,000,000 |
Total cost of oil reserves | $ 7,300,000 | |
= | (Cost – Residual value) / Estimated total units | |||||
= | ($7,300,000 ̶ $0) / 400,000 barrels | |||||
= | $18.25 per barrel | |||||
= | Depletion per unit × Number of units extracted | |||||
= | $18.25 per barrel × 65,000 barrels | |||||
= | $1,186,250 | |||||
Date | Accounts and Explanation | Debit | Credit | |||
Oil and Gas Properties | 6,300,000 | |||||
Cash | 6,300,000 | |||||
To record purchase of oil reserves. | ||||||
Oil and Gas Properties | 1,000,000 | |||||
Cash | 1,000,000 | |||||
To record payment of costs associated with purchase of oil reserves. | ||||||
Depletion Expense—Oil and Gas Properties | 1,186,250 | |||||
Accumulated Depletion—Oil and Gas Properties | 1,186,250 | |||||
To record depletion. |
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