perceietio 9.33 The Oklahoma Oil Company incurred acquisi- tion, exploration, an

Question

perceietio 9.33 The Oklahoma Oil Company incurred acquisi- tion, exploration, and development costs during 2016 as given in Table P9.33. The market price of oil during 2016 was S60 per barrel each One (a) Determine the cost basis for depletion on each duceo $15,0 tion e bas a deple (a) C (b) During 2016, 1,200,000 barrels were extracted from parcel A at a production cost of $3,600,000 Determine the depletion charge allowed tor parcel A for bas (e) In part (b), if Oklahoma Oil Company sold sold F 1,000,000 of the 1,200,000 barrels extracted during 2016 at a price of $75 per barrel, the sales revenue would be fied for the use of percentage depletion (15%), what would be the allowed depletion amount for 2016? build (d) During 2016, 800,000 barrels were extracted at th $125 ing 1 (and sold) from parcel B at a production cot 2 of $3,000,000. Assume that, during 2017, it is . ascertained that the remaining proven reserves g on parcel B total only 4,000,000 barrels (instead urpe of the expected 4,200,000). This revision in straig proven reserves is considered a change in an ex The b repa TABLE P9.33 Site Parceh& Parcel Total Acquisition costs Explaration costs Development costs20 Recoverable oal 10 (e) 22 31 9 54(d 13 9 (millions of barrels) Units are in millions of dollars, except recoverable oil

Explanation / Answer

Answer:

(a)

(b)

Depletion charge for Parcel A = Cost basis for depletion * Barrels extracted / Total recoverable barrels from Parcel A

= 39 * 1.2 / 9 = $ 5.20 million

(c)

If it qualified for use of percentage depletion then allowed depletion amount = Percentage depletion * Cost basis for depletion

= 15% * 39 = $ 5.85 million

(d)

Total depletion charge allowed as per unit cost method for 2016= Cost basis for depletion * Barrels extracted / Total recoverable barrels from Parcel B

= 24 * .8 / 5 = $ 3.84 million

Total depletion charge allowed as per unit cost method for 2017= Remaining Cost basis for depletion * Barrels extracted / Total recoverable barrels from Parcel B in 2017

= (24-3.84) * 1 / 4 = $ 5.04 million

Item( Numbers in $ millions) Parcel A Parcel B Total Acquisition costs 6 4 10 Exploration costs 13 9 22 Development costs 20 11 31 Cost basis for depletion 39 24 63

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