Q9-4TI - Horngren'S Financial And Managerial Accounting

Question

Amplify Petroleum holds huge reserves of oil. Assume that at the end of 2017, Amplify Petroleum’s cost of oil reserves totaled $80,000,000, representing 100,000,000 barrels of oil. Suppose Amplify Petroleum removed and sold 20,000,000 barrels of oil during 2018. Journalize depletion expense for 2018.

Step-by-Step Solution

Answer

Answer

Depreciation Expense of Oil Reserves is debited by $16,000,000 and Accumulated Depreciation is also credited by $16,000,000.

Step 1: Showing Journal Entry Step 1: Showing Journal Entry

Date	Accounts	Debit ($)	Credit ($)
	Depletion Expense-Oil Reserves	16,000,000
	Accumulated Depreciation-Oil Reserves		16,000,000

Step 2: Calculation of Depletion Expense

$$\begin{gathered} Depletion=\frac{\left(Cost Residual Value\right)}{Estimated total units} \\ =\frac{\left(80,000,000-\$0\right)}{100,000,000 barrels} \\ =\$0.8 per barrel \end{gathered}$$

$$\begin{gathered} Depletion Expence=Depletion per unit\times Number of units extracted \\ =\$0.8\times 20,000,000barrels \\ =\$16,000,000\left(year 1\right) \end{gathered}$$

Depletion means the allocation of the cost of Natural resources that are extracted from the Earth. Examples of natural resources are Diamond, oil, Timber, etc.