Question
Problem 1: Depletion allowance Gunslinger Oil Company purchased for $38,000,000 an oil well estimated to contain 1.2 million barrels of crude oil. When the oil
Problem 1: Depletion allowance
Gunslinger Oil Company purchased for $38,000,000 an oil well estimated to contain 1.2 million barrels of crude oil. When the oil is completely extracted, it is expected that the lead will be worth $1,400,000. A building and equipement costing $6,600,000 were constructed on the mine site, and they will be completely used up and have no salvage value when the oil is exhausted. During the first year, $78,000 barrels of oil was extracted, and $487,500 was spent for labor and other operating costs.
Instructions
(a) Compute the total cost per barrel of oil extracted for year 1 and year 2. (Show computations by setting up a schedule giving cost per barrel.)
(b) During the second year, operating costs and labor were $619,200 and Gunslinger extracted and sold 86,000 barrels of oil. Make the journal entry to record the depletion on December 31 under the direct method.
(c) What is the net book value of the Gunslinger oil well at the end of the second year assuming the use of an accumulated depletion account?
(d) Ignoring partial periods, make the journal entry for the depreciation expense on the building and equipement for the second year.
**Please give step by step process and equation of each part**
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