Barron Fuel purchased an oil well for $200,000. The well is estimated to contain 50,000barrels, have an eight-year life, and have no residual value. If the company extracts andsells 2,000 barrels of oil in the first year, how much in cost of sales should be recorded?a. $8,000b. $20,000c. $25,000d. $100,000
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Barron Fuel purchased an oil well for $200,000. The well is estimated to contain 50,000
barrels, have an eight-year life, and have no residual value. If the company extracts and
sells 2,000 barrels of oil in the first year, how much in cost of sales should be recorded?
a. $8,000
b. $20,000
c. $25,000
d. $100,000
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