Chapman Oil, Inc. has an account titled Oil and Gas Properties

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.