Question

On January​ 1, 2019, Plenty of​ Oil, Inc. purchased an oil field that is estimated to have 20 comma 000 comma 000 barrels of oil for $ 80 comma 000 comma 000. In​ 2019, 1 comma 800 comma 000 barrels of oil were extracted and sold. In​ 2020, 1 comma 900 comma 000 barrels of oil were extracted and sold. The oil field will have no residual value. What is the book value of the oil reserves that will be reported on the balance sheet as of December​ 31, 2020?

Answer 1

Answer:

$65,200,000.

Explanation:

We know,

Depreciation expense rate under unit-of-activity method = (Total cost of the asset - Residual value) ÷ Estimated usage

Therefore, Depreciation expense rate = ($80,000,000 - 0) ÷ 20,000,000 barrels of oil.

Depreciation expense rate = $80,000,000 ÷ 20,000,000 barrels of oil.

Depreciation expense rate = $4 per barrel.

As the company used 1,800,000 barrels during 2019, the depreciation expense for 2019 = 1,800,000 × $4 = $72,000,000

For 2020, the depreciation expenses = 1,900,000 × $4 = $76,000,000

Therefore, accumulated depreciation after December 31, 2020 = $72,000,000 + $76,000,000 = $14,800,000.

Therefore, book value reported on the balance sheet as of December​ 31, 2020 = $80,000,000 - $14,800,000 = $65,200,000.