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Chapter 9: Q11SE (page 528)

Accounting for depletion of natural resources Ajax Petroleum holds huge reserves of oil assets. Assume that at the end of 2018, Ajax Petroleum鈥檚 cost of oil reserves totaled $27,000,000, representing 3,000,000 barrels of oil.

Requirements

  1. Which method does Ajax Petroleum use to compute depletion?
  2. Suppose Ajax Petroleum removed and sold 500,000 barrels of oil during 2019. Journalize depletion expense for 2019.

Short Answer

Expert verified

Depletion expenses for the year are equal to$4,500,000 calculated using the units of production method.

Step by step solution

01

Definition of Natural 91影视

Natural resources are assets that come from the natural earth and are consumed. Examples include iron ore, oil, natural gas, diamonds, gold, and timber these are the natural resources. Depletion is the process by which businesses spread the allocation of a natural resource鈥檚 cost over its usage.

02

A method that must be used for calculation of depletion

Ajax petroleum must use the units of production method to calculate the depletion expenses because it will provide more relevant figures and useful life in terms of barrels is given.

03

Journalizing depletion expenses

Date

Accounts & Explanation

Debit ($)

Credit ($)

Dec 31st 2019

Depletion Expenses 鈥� oil reserves

4,500,000

Accumulated Depletion- oil reserve

4,500,000

(To record depletion expenses)

Working note: Calculation of depletion expenses

Depletionexpenses=Cost鈭�SalvagevalueUsefullifeinbarrels脳Barrelsofoilremovedduringyear=$27,000,000鈭�$03,000,000脳500,000=$4,500,000

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Most popular questions from this chapter

What is goodwill? Is goodwill amortized? What happens if the value of goodwill has decreased at the end of the year?

Computing first-year depreciation and book value

On January 1, 2018, Air Canadians purchased a used airplane for \(37,000,000. Air Canadians expects the plane to remain useful for five years (4,000,000 miles) and to have a residual value of \)5,000,000. The company expects the plane to be flown 1,400,000 miles during the first year.

Requirements

1. Compute Air Canadians鈥檚 first-year depreciation expense on the plane using the following methods:

a. Straight-line

b. Units-of-production

c. Double-declining-balance

2. Show the airplane鈥檚 book value at the end of the first year for all three methods.

2. On January 1, Alamo Cranes purchased a crane for \(140,000. Alamo expects the crane to remain useful for six years (1,000,000 lifts) and to have a residual value of \)2,000. The company expects the crane to be used for 80,000 lifts the first year. Compute the first-year depreciation expense on the crane using the following methods: a. Straight-line b. Units-of-production (Round depreciation per unit to two decimals. Round depreciation expense to the nearest whole dollar.) Compute the first-year and second-year depreciation expense on the crane using the following method: c. Double-declining-balance (Round depreciation expense to the nearest whole dollar.)

: Distinguishing capital expenditures from revenue expenditures consider the following expenditures:

a. Purchase price.

b. Ordinary recurring repairs to keep the machinery in good working order.

c. Lubrication before machinery is placed in service.

d. Periodic lubrication after machinery is placed in service.

e. Major overhaul to extend useful life by three years.

f. Sales tax paid on the purchase price.

g. Transportation and insurance while machinery is in transit from seller to buyer.

h. Installation.

i. Training of personnel for initial operation of the machinery. Classify each of the expenditures as a capital expenditure or revenue expenditure

Whitney Plumb Associates surveys American eating habits. The company鈥檚 accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated Depreciation account for each asset. During 2018, Whitney Plumb completed the following transactions:

Jan. 1 Purchased office equipment, \(117,000. Paid \)77,000 cash and financed the remainder with a note payable.

Apr. 1 Acquired land and communication equipment in a lump-sum purchase. Total cost was \(350,000 paid in cash. An independent appraisal valued the land at \)275,625 and the communication equipment at \(91,875.

Sep. 1 Sold a building that cost \)520,000 (accumulated depreciation of \(285,000 through December 31 of the preceding year). Whitney Plumb received \)390,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of \(25,000.

Dec. 31 Recorded depreciation as follows:

Communication equipment is depreciated by the straight-line method over a five-year life with zero residual value. Office equipment is depreciated using the double-declining-balance method over five years with a \)2,000 residual value.

Record the transactions in the journal of Whitney Plumb Associates.
See all solutions

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