Isidro purchases an interest in an oil-producing property for $100,000 on November 3. His geologist estimates 15,000 barrels of oil are recoverable. The entity sells 1,000 barrels for $20,000 duringNovember and December of the year of acquisition. Assume the percentage depletion rate for oil is 15%.Operating expenses related to the revenues are $3,000.

a. Advise Isidro on the amount of depletion he should deduct in the year of acquisition.

b. At the end of the second year, the geologist estimates the remaining number of recoverable barrels is 18,000. Isidro has an offer of $190,000 for his investment. In the second year, the entity sold only 3,000 barrels of oil. Gross revenues were $50,000 and operating expenses totaled $4,000. If Isidro sells the property, what is the amount of his realized gain?

c. Write a memorandum explaining the details of Isidro’s gain. Include a recommendation about whether he should accept the offer.