Question

In January 2020, Company A leased a mineral mine for $3,550,000 with removable ore estimated by geological surveys at 2,500,000 tons. Company A incurred $1,150,000 of intangible development costs preparing the property for the extraction of ore. The present value of the cost of restoring the mine is estimated to be $250,000. During 2020, 340,000 tons were removed and 300,000 tons were sold. How much depletion expense should Company A recognize for the year ended December 31, 2020?

a) $516,800
b) $673,200
c) $594,000
d) $642,000

Answer 1

Company A should recognize a depletion expense of $673,200 for the year ended December 31, 2020, calculated by multiplying the per-unit depletion rate of $1.98 per ton by the 340,000 tons removed.

Step-by-step explanation:

The depletion expense for Company A for the year ended December 31, 2020, can be calculated by following the cost depletion method. This involves allocating the total cost of acquiring, developing, and preparing the property for extraction over the quantity of extractable ore. Initially, the total depletable capital is computed:

Total depletable capital = Leased mine cost + Development costs + Restoration costs = $3,550,000 + $1,150,000 + $250,000 = $4,950,000.

The per-unit depletion rate is calculated by dividing the total depletable capital by the estimated recoverable units of ore:

Per-unit depletion rate = Total depletable capital / Estimated recoverable units = $4,950,000 / 2,500,000 tons = $1.98 per ton.
Finally, the depletion expense can be determined by multiplying the per-unit depletion rate by the number of tons removed during the year 2020:

Depletion expense = Per-unit depletion rate × Tons removed = $1.98 × 340,000 tons = $673,200.