Question

Frank purchased land containing oil reserves for $425,000. He estimates the value of the land without the oil is $25,000. He also estimates that he can extract 20,000 barrels of oil from the property. In the first year of his endeavor, the property produced 6,000 barrels of oil. Assuming Frank uses the cost depletion method, his depletion expense for the year is $(1).

a. $120,000
b. $150,000
c. $180,000
d. $240,000

Answer 1

To calculate Frank's depletion expense for the year, we can use the cost depletion method. The depletion expense is $120,000.

Step-by-step explanation:

To calculate the depletion expense using the cost depletion method, we need to determine the cost per barrel of oil. First, we subtract the value of the land without the oil ($25,000) from the total cost of the land ($425,000) to get the cost of the oil reserves ($400,000).

Then, we divide the cost of the oil reserves by the estimated number of barrels of oil (20,000) to get the cost per barrel of oil ($20). Finally, we multiply the cost per barrel of oil by the number of barrels produced in the first year (6,000) to calculate the depletion expense for the year, which is $120,000.