Alaska Energy Corporation paid cash to acquire land to be used for oil production. The costs incurred by Alaska Energy were the following
Exploration of proposed land...............................$150, 000
Geologic surveys of land......................................250, 000
Estimated oil reserves..........................................870,000
Cost to purchase land........................................6,500,000
Estimated were made that 3,885,000 gallons of crude oil can be extracted from the site over the life of the asset.
Required:
a) Prepare the journal entry(ies) to record the purchase of the oil field.
b) Given that Alaska Energy was able to extract
230,000 gallons in the first year,
675.000 gallons in the second year, and
554,000 gallons in the third year
Calculate the depletion charge for each year and prepare the necessary Journal entries.