Texas Oil Company (TOC) paid $ 3,000,000 for an oil reserve estimated to hold 50,000 barrels of oil. Oil production is expected to be 10,000 barrels in year 1, 30,000 barrels in year 2, and 10,000 barrels in year 3. TOC expects to begin selling barrels from its oil inventory in year 4.
Assuming these estimates prove to be accurate, show the balances in the oil reserve, accumulated depletion, and oil inventory accounts in each of the three years. What effect does this yearly depletion have on the income statement?