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Chapter 9: Q39PGB (page 536)

Donahue Oil Incorporated has an account titled Oil and Gas Properties. Donahue paid \(6,400,000 for oil reserves holding an estimated 400,000 barrels of oil. Assume the company paid \)510,000 for additional geological tests of the property and $470,000 to prepare for drilling. During the first year, Donahue removed and sold 75,000 barrels of oil. Record all of Donahue鈥檚 transactions, including depletion for the first year.

Short Answer

Expert verified

Depletion expense for the year: $1,383,750

Step by step solution

01

Journal entry for the acquisition

Date

Particular

Debit

Credit

Jan 1.

Oil and Gas reserve

$ 7,380,000

To Cash

$ 7,380,000

Being oil and gas reserve purchased with additional expense

Working:

Acquisitioncostofreserve=Purchaseprice+Geologicaltest+Drillingexpense=$6,400,000+$510,000+$470,000=$7,380,000

02

Journal entry for depreciation

Date

Particular

Debit

Credit

Dec 31.

Depletion expense - Oil and Gas reserve

$ 1,383,750

To Accumulated depletion 鈥� Oil and Gas reserve

$ 1,383,750

Being depletion charged for extraction


Working:

Depletionperbarrel=Cost-ResidualValueEstimatedoilreserve=$7,380,000-$0400,000=$18.45Depletionexpense=Depletionperbarrel脳No.ofbarrelsextracted=$18.45脳75,000=$1,383,750

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Most popular questions from this chapter

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

Changing the estimated life of an asset

Assume that Smith鈥檚 Auto Sales paid $45,000 for equipment with a 15-year life and zero expected residual value. After using the equipment for six years, the company determines that the asset will remain useful for only five more years.

Requirements

1. Record depreciation expense on the equipment for Year 7 by the straight-line method.

2. What is accumulated depreciation at the end of Year 7?

This problem continues the Canyon Canoe Company situation from Chapter 8. Amber and Zack Wilson are continuing to review business practices. Currently, they are reviewing the company鈥檚 property, plant, and equipment and have gathered the following information:

Asset

Acquisition Date

Cost

Estimated Life

Estimated Residual value

Depreciation Method

Monthly Depreciation Expense

Canoes

Nov. 3, 2018

\(4,800

4 Years

\) 0

SL

$100

Land

Dec 1, 2018

85,000

n/a

Building

Dec 1, 2018

35,000

5 Years

5,000

SL

500

Canoes

Dec 2, 2018

7,200

4 Years

0

SL

150

Computer

Mar. 2, 2019

3,600

3 Years

300

DDB

Office Furniture

MAR. 3, 2019

3,000

5 Years

600

SL

*SL = Straight@line; DDB = Double@declining@balance

Requirements

1. Calculate the amount of monthly depreciation expense for the computer and office furniture for 2019.

2. For each asset, determine the book value as of December 31, 2018. Then, calculate the depreciation expense for the first six months of 2019 and the book value as of June 30, 2019.

3. Prepare a partial balance sheet showing Property, Plant, and Equipment as of June 30, 2019.

Making a lump-sum asset purchase

Concord Pet Care Clinic paid \(210,000 for a group purchase of land, building, and equipment. At the time of the acquisition, the land had a market value of \)110,000, the building \(88,000, and the equipment \)22,000. Journalize the lump-sum purchase of the three assets for a total cost of $210,000, the amount for which the business signed a note payable.

Amplify Petroleum holds huge reserves of oil. Assume that at the end of 2017, Amplify Petroleum鈥檚 cost of oil reserves totaled $80,000,000, representing 100,000,000 barrels of oil. Suppose Amplify Petroleum removed and sold 20,000,000 barrels of oil during 2018. Journalize depletion expense for 2018.
See all solutions

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