Ferro Fuel Company (FFC) acquired a tract of land to be used for oil and gas exploration at the beginning of the current year. FFC paid $ 500,000 to acquire the land, paid $ 325,000 in development costs, and incurred $ 130,000 in exploration and evaluation costs for nonproducing wells and $ 200,000 for a producing well. The asset retirement obligation is estimated at $ 100,000. The producing well is expected to generate 1,000,000 barrels of oil over its useful life. Assume all expenditures are paid in cash.
Required
a. Determine the total cost of the natural resource under the full- cost method.
b. Prepare the journal entries to record the acquisition of the natural resource.
c. Record the depletion of the natural resource at the end of the first year assuming that 145,000 barrels of oil are produced during the first year of operations. Depletion is recorded under the units- of- output method.