On March 17, 2013, the Wildcat Oil Company began operations at its Louisiana oil field. Theoil field had been acquired several years earlier ata cost of $32.5 million. The field is estimated tocontain 6.5 million barrels of oil and to have a salvage value of $3 million both before and after all ofthe oil is pumped out. Equipment costing $480,000was purchased for use at the oil field. The equipment will have no economic usefulness once theLouisiana field is depleted; therefore, it is depreciated on a units-of-production method. In addition,Wildcat Oil built a pipeline at a cost of $2,880,000to serve the Louisiana field. Although this pipelineis physically capable of being used for many years,its economic usefulness is limited to the productivelife of the Louisiana field; therefore, the pipelinehas no salvage value. Depreciation of the pipelineis based on the estimated number of barrels of oil tobe produced. Production at the Louisiana oil fieldamounted to 420,000 barrels in 2015 and 510,000barrels in 2016.(a) Compute the per barrel depletion rate of the oilfield during the years 2015 and 2016.(b) Compute the per barrel depreciation rates ofthe equipment and the pipeline during the years2015 and 2016.
On March 17, 2013, the Wildcat Oil Company began operations at its Louisiana oil field. The
oil field had been acquired several years earlier at
a cost of $32.5 million. The field is estimated to
contain 6.5 million barrels of oil and to have a salvage value of $3 million both before and after all of
the oil is pumped out. Equipment costing $480,000
was purchased for use at the oil field. The equipment will have no economic usefulness once the
Louisiana field is depleted; therefore, it is
Wildcat Oil built a pipeline at a cost of $2,880,000
to serve the Louisiana field. Although this pipeline
is physically capable of being used for many years,
its economic usefulness is limited to the productive
life of the Louisiana field; therefore, the pipeline
has no salvage value. Depreciation of the pipeline
is based on the estimated number of barrels of oil to
be produced. Production at the Louisiana oil field
amounted to 420,000 barrels in 2015 and 510,000
barrels in 2016.
(a) Compute the per barrel depletion rate of the oil
field during the years 2015 and 2016.
(b) Compute the per barrel depreciation rates of
the equipment and the pipeline during the years
2015 and 2016.
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