Question

WD Mining Company purchased a section of land for $600,000 in 2006 to develop a zinc mine. The mine began operating in 2008. At that time, management estimated that the mine would produce 200,000 tons of quality ore. A total of 100,000 tons of ore was mined and processed from 2008 through December 31, 2015. During January 2016, a very promising vein was discovered. The revised estimate of ore still to be mined was 250,000 tons. Estimated salvage value for the mine land was $100,000 in both 2008 and 2016. Assuming that 10,000 tons of ore was mined in 2016, the computation WD Mining Company should use to determine the amount of depletion to record in 2016 would be:

a) (($600,000 - $100,000)/450,000 tons) × 10,000 tons.
b) (($600,000 - $100,000)/350,000 tons) × 10,000 tons.
c) (($600,000 - $100,000 - $250,000)/350,000 tons) × 10,000 tons.
d) (($600,000 - $100,000 - $250,000)/250,000 tons) × 10,000 tons.

Answer 1

The correct formula for calculating the depletion expense for WD Mining Company in 2016 after a new vein of ore was discovered is (($600,000 - $100,000) / 450,000 tons) × 10,000 tons, which is option a. This calculation considers the revised total estimated ore to be 450,000 tons, including the new discovery. Option A is correct answer.

Step-by-step explanation:

The question involves the calculation of the depletion expense for a mining company, which is a concept in managerial and cost accounting. Depletion is a method of allocating the cost of natural resources, such as minerals, over the period they are consumed. In this scenario, we need to adjust the original depletion rate after more ore was discovered.

To calculate the depletion expense for 2016, we start with the cost of the land ($600,000) and subtract the salvage value ($100,000), which gives us the depletable base. Since the estimated reserves have increased with the new discovery, the total amount of quality ore to be considered is the original estimate plus the newly discovered ore. This gives us a revised estimate of 200,000 tons (initial) + 250,000 tons (new) = 450,000 tons.

Using the revised estimate, we can compute the depletion per ton as: (Cost - Salvage Value) / Total revised estimated ore, which translates to ($600,000 - $100,000) / 450,000 tons. For each ton mined in 2016, we will then multiply this rate by the tons of ore mined (10,000 tons in 2016). Thus, the correct formula to determine the amount of depletion to record in 2016 would be: (($600,000 - $100,000) / 450,000 tons) × 10,000 tons.

The final answer to the question, using the provided formula, is option a.