33PGA - Horngren'S Financial And Managerial Accounting

Question

Question: Accounting for natural resources Conseco Oil, Inc. has an account titled Oil and Gas Properties. Conseco paid \(6,600,000 for oil reserves holding an estimated 1,000,000 barrels of oil. Assume the company paid \)570,000 for additional geological tests of the property and $450,000 to prepare for drilling. During the first year, Conseco removed and sold 72,000 barrels of oil. Record all of Conseco’s transactions, including depletion for the first year.

Step-by-Step Solution

Answer

Answer

Depletion expenses for the year total $548,640.

Step 1: Definition of Depletion Expenses

The expense reported to allocate and spread the cost incurred for acquiring a natural resource over the useful life of the natural resource is known as depletion expense.

Step 2: Journal entries for transactions

Date	Accounts and Explanation	Debit ($)	Credit ($)
1	Oil and gas properties	6,600,000
	Cash		6,600,000
2	Oil and gas properties	1,020,000
	Cash		1,020,000
3	Depletion expenses - Oil and gas properties	548,640
	Accumulated depletion - Oil and gas properties		548,640

Working note:

Calculation of depletion expenses:

$\begin{array}{rcl}Depletionexpenses& =& \frac{Cost}{Usefullifeinbarrels}\times Barrelsremovedintheyear\\ & =& \frac{\$7,620,000}{1,000,000}\times 72,000\\ & =& \$548,640\\ & & \end{array}$