On April 1, 2017 the J&A; mining company invested in an oil field paying $12,000
ID: 2595002 • Letter: O
Question
On April 1, 2017 the J&A; mining company invested in an oil field paying $12,000,000 for the field. J&A; will builds a new road at a cost of $72,000, installed street lights for $18,000 ,digs exploratory oil wells at a cost of $650,000 and estimates that it will have to pay another $100,000 to restore the land once the oil has been removed and the land restored to what it had been before the drilling. J&A; estimates that it will extract 4,000,000 barrels of oil. In 2017 J&A; extracts 500,000 barrels of oil and sells 450,000 barrels. Required: 1) What is the cost per barrel of gil 2) Record the journal entry to record the amount of oil extracted. 3) Record the journal entry to record (cost only) the sale of the oil. 4) What is the value of the ending inventory on the balance sheet at the end of 2017 5) What is the value of the resource (oil field) on the balance sheet at the end of 2017 6) If the road has a life of 8 years and the street light has a life of 10 years, what is the depreciation entry (if any) in 2017 for these assets.Explanation / Answer
Answer to part 1
Cost per barrel of oil = (oil field cost + costruction cost + street lights cost + exploration cost + restoration cost -salvage value) / estimate barrels of oil
= ($12000000 + 72000 + 18000 + 650000 + 100000 - 0) / 4000000
= $3.21
Answer to part 2
Oil Inventory (50000 x 3.21) 160500
Depletion Expense(450000 x 3.21) 1444500
Oil Wells Assets(500000 x 3.21) 1605000
Answer to part 3
Cash (450000 x 3.21) 1444500
Revenue Income 1444500
Answer to part 4
Value of ending inventory = 50000 x 3.21 = 160500
Answer to part 5
Value of oil field = Total cost of oil field - Total depletion of mine
= 12840000 - 1605000 = 11235000
Answer to part 6
Depreciation on road( 72000 / 8) 9000
Depreciation on street light (18000 / 10) 1800
Accumulated depreciation 10800
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