4. Devo Oil Company acquired property rights to search for natural resources on land that it is convincedhas oil reserves, for $15,400,000. The contract requires that Devo restore the property to a statususable for a park after drilling and extraction are complete. The estimated cost of this restoration is$2,350,000. Devo incurs exploration costs of $1,320,000 and intangible development costs of$1,535,000. Geological surveys suggest that approximately 1,100,000 barrels of oil can be extractedfrom the site. In 2025, Devo extracts 235,000 barrels of oil.Instructions(1) What is the depletion base for this location for Devo Oil?(2) What is the depletion cost per unit (barrel) to used by Devo for this site (round to the nearestcent)?(3) What journal entry is required to record the extraction of the oil for the first year?(4) If 150,000 barrels of oil are sold within the initial year, what is the cost of goods sold for the oil andthe remaining inventory balance?

Depreciation is very important in accounting but the method of depreciation should be used properly otherwise there would be no meaning. In oil extraction the the oil produced is used as basis for depreciation accounting. As per Honor code of company first three parts will be solved, for remaining repost question.Part 1 Depletion base is total cost involved in extraction of oil. Total cost=oil reserves+cost of restoration+Exploration cost+development cost Total cost of extraction=15400000+2350000+1320000+1535000=$20,605,000 Total base cost of depletion=$20,605,000 Part 2 Total oil that can be extraced=1100000 barrels Cost of one unit barrel=Total base costtotal oil that can be extracted=206050001100000=$18.73 Cost of one unit barrel=$18.73 Part 3 Oil extracted=235000 barrels Depreciation for year=oil extracted x cost per barrel=235000 x 18.73=$4401977.27 Depreciation for year=$4401977.27 Date Account name Debit Credit 31/12/2025 Depreciation expense account $4401977.27 Accumulated depreciation account $4401977.27

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4. Devo Oil Company acquired property rights to search has oil reserves, for $15,400,000. The contract requires that Devo restore the property to usable for a park after drilling and extraction are complete. The estimated cost of this restor $2,350,000. Devo incurs exploration costs of $1,320,000 and intangible development c $1,535,000. Geological surveys suggest that approximately 1,100,000 barrels of oil can be e from the site. In 2025, Devo extracts 235,000 barrels of oil. Instructions

4. Devo Oil Company acquired property rights to search has oil reserves, for $15,400,000. The contract requires that Devo restore the property to usable for a park after drilling and extraction are complete. The estimated cost of this restor $2,350,000. Devo incurs exploration costs of $1,320,000 and intangible development c $1,535,000. Geological surveys suggest that approximately 1,100,000 barrels of oil can be e from the site. In 2025, Devo extracts 235,000 barrels of oil. Instructions

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

4. Devo Oil Company acquired property rights to search for natural resources on land that it is convinced
has oil reserves, for $15,400,000. The contract requires that Devo restore the property to a status
usable for a park after drilling and extraction are complete. The estimated cost of this restoration is
$2,350,000. Devo incurs exploration costs of $1,320,000 and intangible development costs of
$1,535,000. Geological surveys suggest that approximately 1,100,000 barrels of oil can be extracted
from the site. In 2025, Devo extracts 235,000 barrels of oil.
Instructions
(1) What is the depletion base for this location for Devo Oil?
(2) What is the depletion cost per unit (barrel) to used by Devo for this site (round to the nearest
cent)?
(3) What journal entry is required to record the extraction of the oil for the first year?
(4) If 150,000 barrels of oil are sold within the initial year, what is the cost of goods sold for the oil and
the remaining inventory balance?

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