Question - After a big fight with Alaska natives and Greenpeace, Messy Oil Company finally was able to purchase the right to drill pm 2,000 acres of land in Alaska at a cost of $100,000. The exploration costs for the discovered oil deposit are $200,000 and development costs in constructing and drilling the well are $800,000. This does not include the costs of the heavy equipment needed to drill the well, which was $300,000. This drilling equipment (which has a useful life of 25 years and no salvage value) will be used again to drill other wells in Alaska and elsewhere. When the well is pumped dry, the cost to restore the site to pristine wilderness is estimated to be $100,000. Geologists anticipate that the well will produce 1,000,000 barrels of oil all together.
1. Calculate the dollar amount of the depletion recorded during the first year if $300,000 barrels of oil are extracted and sold during the year.
2. In the second year, 500,000 barrels are extracted but only 400,000 barrels are sold. How much cost of goods sold expense should be recorded on the income statement of Messy Oil Company during the second year?