Question

Chapter 9: Plant assets, natural resources, and intangible assets

1/ What is the depletion cost per barrel if a newly discovered oil well costs $6 million to acquire, drilling permits cost $525,000, and site preparation costs are $800,000? Assume that the well will yield 15 million barrels of oil and have no salvage value. (Round the answer to the nearest penny.)

2/Beacon Petroleum purchased an operational oil well for $8 million and expects to extract 16 million barrels over the 10 year life of the well. Beacon estimated the well’s salvage value to be zero. What is the firm’s cost of goods sold for year 1 if it extracts 2.5 million barrels of oil and sells 2.0 million barrels of oil?

Please show your work. Thanks

Answer 1

1.

Cost of oil well = Purchase price + Drilling permit cost + Site preparation cost

= 6,000,000 + 525,000 + 800,000

= $7,325,000

Depletion cost per barrel = Cost of oil well/Estimated barrel of oil

7,325,000/15,000,000

= $0.49

2.

Depletion cost per barrel = Cost of oil well/Estimated barrel of oil

= 8,000,000/16,000,000

= $0.50

Oil extracted = 2.5 million barrel

Oil sold = 2 million barrel

Cost of goods sold = Depletion cost per barrel x Quantity of oil sold

= 0.50 x 2,000,000

= $1,000,000

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