Question

A firm began a mineral exploitation venture during the current year by spending (1) $40 million for the mineral rights; (2) $100 million exploring for the minerals, one-fourth of which were successful; and (3) $60 million to develop the site. Management estimated that 20 million tons of ore would ultimately be removed from the property. Wages and other extraction costs for the current year amounted to $10 million. In total, 2 million tons of ore were removed from the deposit in the current year. The entire production for the period was sold.

What amount of depletion is recognized during the current year under the full costing method?
A. $30 million
B. $12.5 million
C. $10 million
D. $22.5 million

Answer 1

Depletion costs = $20 million

COGS = $20 million + $10 million = $30 million

Step-by-step explanation:

When a company uses the full costing method, all the acquisition, exploration, and development costs are added into one single cost pool. This method is used by mining and oil corporations since the exploration sites are not always successful, so the costs related to unsuccessful sites is included in the costs of successful exploration sites.

The total cost pool associated to this mining venture = $40 million + $100 million + $60 million = $200 million

Since the firm estimates total reserves to be 20 million tons, then the depletion amortization per ton = $200 million / 20 million tons = $10 per ton

2 million tons were extracted this year x $10 per ton = $20 million