Question

Can someone explain the calculations for cost basis and how to compute it?

Herberger Oil & Gas Company paid $10 million for the drilling rights to a 1,000 acre tract of land near Midland, Texas. On the basis of several exploratory wells that had cost an aggregate of $400,000 to drill, petroleum engineers estimated that the tract of land might contain as much as 500,000 barrels of oil. 4 additional development wells were drilled at a cost of approximately $200,000 each. Calculate the depletion expense for the first year assuming that 100,000 barrels are extracted. Calculate the depletion expense for the second year assuming that 150,000 barrels are extracted. Round answers to the nearest whole number Year 1 - $? Year 2 - $? What is the cost basis of the remaining reserves at the end of the second year? $?

Answer 1

Particulars	Amount
Cost Of Drilling Rights	$ 10,000,000.00
Cost Of exploratory wells	$        400,000.00
Cost Of Additional wells (200000*4)	$        800,000.00
Total Cost of wells	$ 11,200,000.00
Estimated barrels of oils	$        500,000.00
Depletion Cost Per Barrel	$                   22.40
Year-1
Extraction	$        100,000.00
Depletion Cost Per Barrel	$                   22.40
Depletion Expense	$    2,240,000.00
Year-2
Extraction	$        150,000.00
Depletion Cost Per Barrel	$                   22.40
Depletion Expense	$    3,360,000.00
Cost basis of the remaining reserves	$    5,600,000.00
(11200000-2240000-3360000)