Question

An oil well cost $1,832,500 and is calculated to hold 200,000 barrels of oil. There is...

An oil well cost $1,832,500 and is calculated to hold 200,000 barrels of oil. There is no residual value. Which journal entry is needed to record the expense for the extraction of 40000 barrels of oil during the year? All 40,000 barrels were sold during the year.

A. Depletion Expense- Oil 366500

Oil Revenue 366500

B. Oil Reserve Inventory 366500

Accumulated Depletion- Oil 366500

C. Depletion Expense-Oil 366500

Accumulated Depletion-Oil 366500

D. Cost of Goods Sold-Oil -366500

Accumulated Depletion Oil- 366500

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Answer #1

The journal entry to record the depletion expense for the year would include a Debit to Depletion Expense - Oil and a Credit to Accumulated Depletion - Oil with the amount of extraction made during the year. The value of depletion is calculated as below:

Depletion During the Year = Oil Well Cost/Total Barrels*Barrels Extracted During the Year = 1,832,500/200,000*40,000 = $366,500

The journal entry in required format is provided as below:

Account Titles Debit Credit
Depletion Expense - Oil $366,500
Accumulated Depletion -Oil $366,500

Answer is Option C.

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