M8-19. Computing and Recording Depletion Expense The Nelson Oil Company estimate

Question

M8-19. Computing and Recording Depletion Expense The Nelson Oil Company estimated that the oil reserve that it acquired in 2016 would produce 4 million barrels of oil. The company extracted 300,000 barrels the first year, 500,000 barrels in 2017, and 600,000 barrels in 2018. Nelson paid $32,000,000 for the oil reserve. a. Compute the depletion expense for each year-2016, 2017, and 2018. b. Prepare the journal entries to record (i) the acquisition of the oil reserve, and (ii) the depletion for 2016 Open T-accounts and post the entries from part b in the accounts. c.

Explanation / Answer

Solution a.:

Estimated barrels of oil = 4,000,000

Oil Reserve Cost = $32,000,000

Depletion Expense = (Oil reserve Value / Estimated total Barrels of Oil) * Barrels Extracted in the current year

Depletion Expense in 2016 = ($32,000,000 / 4,000,000) * 300,000 = $2,400,000

Depletion Expense in 2017 = ($32,000,000 / 4,000,000) * 500,000 = $4,000,000

Depletion Expense in 2017 = ($32,000,000 / 4,000,000) * 600,000 = $4,800,000

Solution b.:

Solution c.:

Journal Entries - Nelson Oil Company Date Particulars Debit Credit 1-Jan-16 Oil Reserve Dr. $32,000,000.00            To Cash A/c $32,000,000.00 (Being Oil Reserve Acquired) 31-Dec-16 Depletion Expense Dr. $2,400,000.00            To Accumulated depletion expense A/c $2,400,000.00 (Being Depletion on oil reserve recorded)

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