On March 1, 2014, Anniston Company purchased an oil well at a cost of $1,950,000
ID: 2446178 • Letter: O
Question
On March 1, 2014, Anniston Company purchased an oil well at a cost of $1,950,000. It is estimated that 250,000 barrels of oil can be produced over the remaining life of the well and the residual value of the well will be $200,000. During 2014, 25,000 barrels of oil were produced and 19,000 barrels were sold. Which of the following statements is correct with respect to the accounting for the oil well? (Do not round your intermediate calculations.) The 2014 cost of goods sold was $175,000. The 2014 cost of goods sold was $42,000. The inventory of oil was $42,000 at December 31, 2014. The book value of the oil well decreased $133,000 during 2014.
Explanation / Answer
GIVEN,
COST OF OIL WELL=$19,50,000
TOTAL OIL BARRELS TO BE PRODUCED DURING LIFE OF OILWELL=2,50,000
RESIDUAL VALUE OF OILWELL=$2,00,000
COST PER BARREL TO BE PRODUCED=($19,50,000-$2,00,000)/2,50,000=$7
BARRELS PRODUCED DURING 2014=25,000
BARRELS SOLD DURING 2014=19,000
CLOSING INVENTORY AT 1/DEC/2014=25,000-19,000=6,000BARRELS
THE 2014 COST OF GOODS SOLD=19,000*$7=$1,33,000
VALUE OF INVENTORY AT DEC 31,2014=6,000*$7=$42,000
HENCE THE STATEMENT THE INVENTORY OF OIL WAS $42,000 AT DECEMBER 31,2014 IS CORRECT
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