Carrolton Oil and Gas, an independent oil and gas producer, is approved to use a 20% of gross income depletion allowance. The write-off last year was $700,000 on its horizontal directional drill wells. Determine the estimated total reserves in barrels if the volume pumped last year amounted to 1% of the total and the delivered product price averaged $40 per barrel.
What will be an ideal response?
Percentage depletion = 0.20(GI) = 700,000
GI = $3,500,000
Let N = number of barrels
GI = N × price
3,500,000 = N × 40
N = 87,500
Reserves = 87,500/0.01
= 8,750,000 barrels
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