Glick Company purchased oil rights on July 1, Year 1 for $2,800,000. A total of 200,000 barrels of oil are expected to be extracted over the assets life, and 50,000 barrels are extracted and sold in Year 1. Which of the following correctly summarizes the effect of the Year 1 depletion expense on the elements of the financial statements? (Do not round intermediate calculations.):

A decrease in stockholders' equity of $200,000.

A decrease in assets of $500,000.

A decrease in assets of $700,000.

An increase in stockholders' equity of $740,000.

Question

Malaki Keith

Business

7 December, 16:54

Glick Company purchased oil rights on July 1, Year 1 for $2,800,000. A total of 200,000 barrels of oil are expected to be extracted over the assets life, and 50,000 barrels are extracted and sold in Year 1. Which of the following correctly summarizes the effect of the Year 1 depletion expense on the elements of the financial statements? (Do not round intermediate calculations.):

A decrease in stockholders' equity of $200,000.

A decrease in assets of $500,000.

A decrease in assets of $700,000.

An increase in stockholders' equity of $740,000.

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Answers (1)

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Tito · Answer 1

The correct option is a decrease in asset of $700,000

Explanation:

depletion expense for 1st year=total cost of oil rights/total estimated barrels*barrels extracted in 1st year

total cost of oil rights is $2,800,000

total estimated barrels to be extracted from oil rights is 200,000 barrels

barrels extracted in 1st year is 50,000 barrels.

depletion expense in 1st year=$2,800,000/200,000*50,000

=$700,000

The implication of this depletion expense is that the oil rights would worth $700,000 less at the end of first year, a decrease in assets of by $700,000 is the correct option