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Chapter 9: 33PGA (page 534)

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鈥檚 transactions, including depletion for the first year.

Short Answer

Expert verified

Answer

Depletion expenses for the year total$548,640.

Step by step solution

01

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.

02

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:

Depletionexpenses=CostUsefullifeinbarrels脳Barrelsremovedintheyear=$7,620,0001,000,000脳72,000=$548,640

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Most popular questions from this chapter

What is an intangible asset? Provide some examples

Discarding of a fully depreciated asset On June 15, 2017, Family Furniture discarded equipment that cost \(27,000, a residual value of \)0, and was fully depreciated. Journalize the disposal of the equipment

How is discarding of a plant asset different from selling a plant asset?

During 2018, Lora Company completed the following transactions:

Jan. 1 Traded in old office equipment with book value of \(55,000 (cost of \)129,000 and accumulated depreciation of \(74,000) for new equipment. Lora also paid \)55,000 in cash. Fair value of new equipment is \(116,000. Assume the exchange had commercial substance.

Apr. 1 Sold equipment that cost \)12,000 (accumulated depreciation of \(1,000 through December 31 of the preceding year). Lora received \)7,100 cash from the sale of the equipment. Depreciation is computed on a straightline basis. The equipment has a five-year useful life and a residual value of \(0.

Dec. 31 Recorded depreciation as follows:

Office equipment is depreciated using the double-declining-balance method over four years with a \)7,000 residual value.

Record the transactions in the journal of Lora Company.

Jim Reed manages a fleet of utility trucks for a rural county government. He鈥檚 been in his job for 30 years, and he knows where the angles are. He makes sure that when new trucks are purchased, the residual value is set as low as possible. Then, when they become fully depreciated, they are sold off by the county at residual value. Jim makes sure his buddies in the construction business are first in line for the bargain sales, and they make sure he gets a little something back. Recently, a new county commissioner was elected with vows to cut expenses for the taxpayers. Unlike other commissioners, this man has a business degree, and he is coming to visit Jim tomorrow.

Requirements

1. When a business sells a fully depreciated asset for its residual value, is a gain or loss recognized?

2. How do businesses determine what residual values to use for their various assets? Are there 鈥渉ard and fast鈥� rules for residual values?

3. How would an organization prevent the kind of fraud depicted here?
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