Louisiana Oil Company (LOC) paid $3,000,000 for an oil reserve estimated to hold 50,000 barrels of oil. Oil production is expected to be 10,000 barrels in year 1, 30,000 barrels in year 2, and 10,000 barrels in year 3. LOC expects to begin selling barrels from its oil inventory in year 2.**Required:**Assuming these estimates are accurate, determine the book value of oil reserves at the end of year 1.

Answered: Louisiana Oil Company (LOC) paid…

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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Louisiana Oil Company (LOC) paid $3,000,000 for an oil reserve estimated to hold 50,000 barrels of oil. Oil production is expected to be 10,000 barrels in year 1, 30,000 barrels in year 2, and 10,000 barrels in year 3. LOC expects to begin selling barrels from its oil inventory in year 2.

**Required:**
Assuming these estimates are accurate, determine the book value of oil reserves at the end of year 1.

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Step 1: Introduction

The net worth or value of an item or a company's equity as documented in its accounting books is referred to as book value. It is estimated by deducting the asset's initial cost from any accrued depreciation, amortization, or depletion of physical assets and any liabilities for businesses. Book value gives an accounting-based view of an asset's or company's value, but it does not always represent market value or economic worth. It is a critical statistic in financial research that is frequently compared to market value to determine the possible undervaluation or overvaluation of assets or a firm.

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