In 2015, Ottawa Oil Corporation paid \($40\) million for a partial interest in a Canadian oil field with proven reserves. The company’s share of the future production was capped at eight million barrels.

Required

1. Assuming that the oil field attains its expected future output, calculate Ottawa’s depletion charge per barrel.

2. Ifin 2016, Ottawa’s share of the field’s total production amounts to two million barrels, what is the firm’s depletion expense for 2016?

3. Go to the following Internet website www.irs.gov and locate Publication 535 “Business Expenses.” Section 9 of this publication is entitled “Depletion.” Read this section to determine how oil and gas companies in the United States calculate their depletion expense for U.S. income tax purposes. How does this tax practice compare to U.S. GAAP?