Garmen Oil Company recently discovered an oil field on one of its properties in Texas. In order to extract the oil, the company purchased drilling equipment on January 1, 2011, for $800,000 cash and also purchased a mobile home on the same date for $54,000 cash to serve as on-site headquarters. The drilling equipment has an estimated useful life of twelve years but will be abandoned when the company shuts down this well. The mobile home has an estimated useful life of seven years and an estimated salvage value of $5,000. The company expects to use the mobile home on other drilling sites after work on this site is completed.

Company geologists estimated correctly that the well would produce two million barrels of oil. Actual production from the well for 2011, 2012, and 2013 was 600,000 barrels, 750,000 barrels, and 650,000 barrels, respectively. All extracted barrels were immediately sold. This well is now dry, and Garmen Oil has shut it down.

REQUIRED:

a. Prepare the entry to record the purchase of the drilling equipment and the mobile home.

b. Prepare the entries to record depletion expense for the drilling equipment using the activity method for 2011, 2012, and 2013.

c. Prepare the entries to record depreciation expenses for 2011, 2012, and 2013 for the mobile home using the straight-line method. Why are different methods used to allocate the costs of the drilling equipment and the mobile home?

d. Assume that Garmen Oil discovered that the well was dry at the end of 2012, (i.e., the well produced only 1,350,000 barrels of oil). Repeat parts (b) and (c).