Question

Daylight Corporation recently bought a tract of land that contains large amounts of an extractable natural resource. Per its purchase contract, Daylight must restore the land to a condition suitable for recreational use once it is done extracting the resource. Daylight estimates that the land contains 4 million tons of recoverable reserves. It also estimates that, after restoration, the land will have a value of $700,000. Other cost information is as follows: Land $6,800,000, Restoration 1,100,000, Geological surveys 1,000,000. Daylight maintains no inventory of extracted material. Given this information, the firm should charge _______ to depletion expense per ton of material extracted.

A. $1.78
B. $1.80
C. $2.05
D. $2.23

Answer 1

Daylight Corporation should charge $2.23 to depletion expense per ton of material extracted.

Step-by-step explanation:

In order to determine the amount that Daylight Corporation should charge to depletion expense per ton of material extracted, we need to calculate the depletion expense per ton. The total cost associated with the land, restoration, and geological surveys is $8,900,000 ($6,800,000 + $1,100,000 + $1,000,000). This total cost needs to be divided by the estimated 4 million tons of recoverable reserves to find the depletion expense per ton.

Depletion expense per ton = Total Cost / Recoverable Reserves

Depletion expense per ton = $8,900,000 / 4,000,000 = $2.225

Therefore, Daylight Corporation should charge $2.23 to depletion expense per ton of material extracted.