Question

The Big Tex Oil Company purchases an oil lease for $1,000,000. After exploration, oil is discovered and it is estimated that 200,000 barrels of oil will be recovered from the lease. If during the current year Big Tex produces 15,000 barrels of oil from the lease and sells 10,000 barrels, what is the amount of cost depletion allowed to Big Tex

Answer 1

The amount of cost depletion allowed to Big Tex Company is $75,000.

Here, we are going to calculate the amount of the cost depletion allowed to Big Tex Oil Company.

• The formulae for the amount of cost depletion is [(Cost of Oil lease / Estimated barrels) * Barrels produced during current year]

Amount of cost depletion = $1,000,000 / 200,000 barrel * 15,000 barrel

Amount of cost depletion = $5 * 15,000 barrel

Amount of cost depletion = $75,000

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