Oklahoma Oil Company incurred acquisition, exploration, and development costs during 2006 as follows:
The market price of oil during 2006 was $16 per barrel.
(a) Determine the cost basis for depletion on each parcel.
(b) During 2006, 1,200,000 barrels were extracted from parcel A at a production cost of $3,600,000. Determine the depletion charge allowed for parcel A.
(c) In (b), if Oklahoma Oil Company sold 1,000,000 of the 1,200,000 barrels extracted during 2006 at a price of $55 per barrel, the sales revenue would be $55,000,000. If it qualified for the use of percentage depletion (15%), what would be the allowed depletion amount for 2006?
(d) During 2006, 800,000 barrels were extracted from parcel B at a production cost of $3,000,000. Assume that during 2007 it is ascertained that the remaining proven reserves on parcel B total only 4,000,000 barrels, instead of the originally estimated 5,000,000. This revision in proven reserves is considered a change in an accounting estimate that must be corrected during the current and future years. (A correction of previous years’ depletion amounts is not permitted.) If 1,000,000 barrels are extracted during 2007, what is the total depletion charge allowed, according to the unit cost method?