Question

In January, 2020, Yager Corporation purchased a mineral mine for $5,100,000 with removable ore estimated by geological surveys at 2,000,000 tons. The property has an estimated value of $300,000 after the ore has been extracted. The company incurred $1,500,000 of development costs preparing the mine for production. During 2020, 600,000 tons were removed and 480,000 tons were sold. What is the amount of depletion that Yager should expense for 2020?

Answer 1

Yager Corporation should expense $1,890,000 for mineral depletion in 2020. This is calculated using the units of production method, where the depletion rate per ton is determined and then multiplied by the number of tons removed during the year.

Step-by-step explanation:

To calculate the amount of depletion expense for Yager Corporation for the year 2020, we need to apply the units of production method. This method allocates the cost of the natural resource based on the proportion of total estimated units extracted during the period.

The total cost of the mine less the residual value gives us the depletable cost basis:

• Purchase price: $5,100,000
• Residual value: $300,000
• Development costs: $1,500,000
• Total depletable cost: ($5,100,000 - $300,000) + $1,500,000 = $6,300,000

The depletion rate per ton is calculated by dividing the total depletable cost by the total estimated reserves:

Depletion rate per ton = $6,300,000 / 2,000,000 tons = $3.15 per ton

The depletion expense for the tons removed in 2020 is:

Depletion expense = 600,000 tons removed x $3.15 depletion rate per ton = $1,890,000

Therefore, Yager Corporation should expense $1,890,000 for mineral depletion in 2020.