Problem:
Cicero Oil Company acquired the rights to explore for oil on a 2,000-acre plot of land in the Oklahoma Panhandle. The rights cost $80,000, and the exploration costs associated with the discovery of a major oil deposit amounted to $125,000. The company incurred $980,000 in developmental costs, of which $250,000 were for tangible equipment. This equipment has the useful life of 10 years and should be in use in the future exploration ventures. During the first year the company extracted 175,000 of the estimated 2.5 million barrels of oil related to the discovery.
Required:
Question: Prepare the journal entry for the first year's depletion and show how the above-mentioned assets would be reported in the balance sheet at the end of the first year.
Note: Please provide equation and explain comprehensively and give step by step solution.