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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