Question

Fortune Drilling Company acquires a mineral deposit at a cost of $5,900,000. It incurs additional costs of $600,000 to access the deposit, which is estimated to contain 2,000,000 tons and is expected to take 5 years to extract. Compute the depletion expense for the first year assuming 418,000 tons were mined.

Answer 1

The depletion expense amounts to $1,358,500

Step-by-step explanation:

The depletion expense is computed as:

Depletion expense = (Mineral Deposit Cost + additional cost ) / Estimation extraction × Number of ton extracted in 1st year

where

Mineral Deposit Cost is $5,900,000

Additional cost is $600,000

Estimation extraction is $2,000,000

Number of ton extracted in 1st year is $418,000

Putting the values in the above:

= ($5,900,000 + $600,000) / ($2,000,000 ×$418,000)

= $65,00,000 / ($2,000,000 ×$418,000)

= $1,358,500