Question

Belmont Pipeline Company purchased 200 barrels of oil from Jadson Oil Company. The gross value of the oil was $20,000. The severance tax rate was 4%. Give the entry to record revenue for Jadson, assuming Belmont disbursed the royalty and remitted all taxes, and assuming a division order as follows:

                                 Property NO. 35              Interest

    --------------------------------------------------

                              Jadson Oil Company             0.875

                              Royalty Owner                      0.125

Answer 1

Entry to record the revenue in Jadson

Cash    Debit 20,800

Royalty Owner   Credit 2,600

Severance Tax Payable Credit    700

Revenue Creidt 17,500

Computation

Gross Value = 20,000

Add: Severance tax @ 4% (20000x4% ) = 800

Less : Royalty Owner Interest in revenue (20000x0.125) = 2,500

Less : Severance tax transfer to Royalty owner (800x0.125) = 100

Balance Amount (20000+800-2500-100) = 18,200

Less : Severance tax Payable (800-100) = 700

Revenue (18,200-700) = 17,500

Severance tax is a state tax imposed on the extraction of non-renewable natural resources intended for consumption by other states.
Severance tax is intended to compensate states for the loss of the non-renewable resources

Royalty owners must pay their pro-rata share of oil severance tax