Question

On January 1, 2019, Devour & Engulf Co. paid $1,657,500 for the mineral rights to an oil shale deposit containing an estimated 390,000 barrels of oil. The company also installed equipment on the site at a cost of $1,150,500 with no expected salvage value, capable of removing the oil shale in six years. The equipment will be abandoned when the oil shale is completed depleted. The company chooses to use a "Units of Production" approach to depreciate its PPE assets at the site. Devour & Engulf began operations on June 1, and extracted and sold 35,000 barrels of oil during the remaining seven months of the year.

REQUIRED:

Give the entries to record the December 31, 2019 amortization of the oil shale mineral rights and depreciation of the equipment.

Answer 1

Amortization of Oil shale mineral rights Cost of Mineral rights (a) Estimated oil barrels (b) Amortization per Barrel (a/b) $ 1,657,500 390,000 $ 4.25 Barrels sold in 2019 Amotization in 2019 ( 35,000 x $4.25) 35,000 148,750 $ $ Depreciation on Equipment Cost of Equipment (a) Estimated Life Annual Depreciation (a/b) (b) $ 1,150,500 6 years $ 191,750 Depreciation for 2019 ( 7 months) $ 111,854.17 Credit $ 148,750.00 Journal Entries in the books of Engulf Co. Date General Journal Debit 31/12/2019 Amortization expense $ 148,750.00 Accumulated Amortization (To record amortization expense) 31/12/2019 Depreciation $ 111,854.17 Accumulated Depreciation (To record Depreciation on equipment) $ 111,854.17

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