Question

In: Accounting

Juan acquires an oil and gas property interest for $500,000. Juan expects to recover 100,000 barrels...

Juan acquires an oil and gas property interest for $500,000. Juan expects to recover 100,000 barrels of oil. Intangible drilling and development costs are $125,000 and are charged to expense. Other expenses are $50,000. During the year, 20,000 barrels of oil are sold for $650,000. Juan's depletion deduction is

A) $100,000.

B) $112,500.

C) $160,000.

D) $600,000.

Solutions

Expert Solution

Here the depletion will he calculated on tha basis number of barrels extracted from the oil and gas property.

Here, the total expected barrels are 100000 barrels.

the deflection to be calculated on the basis of number of ferrous extractive in this year to the total number of barrels extracted from the total life of the property

the cost of oil and Gas property is $500000.

And all expenses are treated as as aunty expenses but not capital expenses to the property.

Now we have to calculate the depletion for this year.

Total number of parallels extracted from the property in this year is 20000 barrels.

Total cost of the property is 5 lakhs.

Calculation of depletion

Total cost × ( this year barrels ) ÷ total barrels

The calculation of depletion is as follows

Total cost is equals to 5 lakh

Barrels extracted this year is 20000 barrels

Total balance expected from the property is 100000 barrels.

Depletion = 500000 × (20000 ÷ 100000)

= 500000 × 0.2

= 100000.

The depletion for the the 20000 barrels is $100000.

The correct answer is option A.

These are all the expressions and calculations required to solve the above given question.

I hope all the above given points, calculations and explanations are useful and helpful to you.

Thank you.


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