Question

4. Arabia Petroleum holds huge reserves of oil. Assume that at the end of 2017​, Arabia Petroleum​'s cost of oil reserves totaled $ 198 comma 000 comma 000​, representing 180 comma 000 comma 000 barrels of oil. Suppose Arabia Petroleum removed and sold 15 comma 000 comma 000 barrels of oil during 2018. Journalize depletion expense for 2018.

Answer 1

Answer:

Debit Depletion expenses for $16,500,000; Credit Accumulated depletion - Oil reserve for $16,500,000.

Explanation:

Cost of reserve = $198,00,000

Barrels of oil = 180,000,000

Cost per barrel = $198,00,000/180,000,000 = $1.10

Depletion expenses = 15,000,000 * $1.10 = $16,500,000

The journal entries for 2018 will be as follows:

Details                                                              Dr ($)                  Cr ($)        

Depletion expenses                                  16,500,000

Accumulated depletion - Oil reserve                                    16,500,000

To record depletion expenses of oil reserve for 2018                              

Answer 2

Answer:

Dr. Depletion Expense         $16,500,000

Cr. Accumulated Depletion $16,500,000

Explanation:

Depletion is an estimated cost of a natural resource that is extracted. This resource is expensed as the extraction is made.

As per given data

Value of oil reserves = $198,000,000

Estimated oil Reserves = 180,000,000 barrels

Oil removed in 2018 = 15,000,000 barrels

Depletion expense is based on ratio of the amount of extraction in period to the total expected resource.

Depletion Expenses = Total Value  x Oil Removed in 2018 / Total reserve

Depletion Expenses = $198,000,000 x 15,000,000 barrels / 180,000,000 barrels = $16,500,000