Question

in january 2015, fehr mining corporation purchased a mineral mine for $6,061,055 with removable ore estimated by geological surveys at 2,513,189 tons. the property has an estimated value of $600,000 after the ore has been extracted. fehr incurred $1,714,980 of development costs preparing the property for the extraction of ore. during 2015, 340,000 tons were removed and 300,000 tons were sold. for the year ended december 31, 2015, fehr should include what amount of depletion in its cost of goods sold?

Answer 1

Fehr Mining Corporation should include $858,000 of depletion in its cost of goods sold for 2015, calculated by determining the depletion rate per ton and then applying the rate to the tons sold.

Step-by-step explanation:

The depletion expense for Fehr Mining Corporation can be calculated by first determining the depletion rate per ton, which is based on the cost less salvage value divided by the total estimated recoverable units. The initial step is to compute the depletion base, taking into account the purchase price of the mine and the development costs, then subtracting the salvage value from this total.

Depletion Base = Purchase Price + Development Costs - Salvage Value.

Depletion Base = $6,061,055 + $1,714,980 - $600,000 = $7,176,035.

Next, we calculate the depletion rate per ton by dividing the depletion base by the estimated recoverable units (tons of ore).

Depletion Rate per Ton = Depletion Base / Estimated Recoverable Units.

Depletion Rate per Ton = $7,176,035 / 2,513,189 tons = approximately $2.86 per ton.

To find the depletion cost to include in the cost of goods sold, we then apply the depletion rate to the number of tons sold during the year.

Depletion Expense = Depletion Rate per Ton × Tons Sold.

Depletion Expense = $2.86 per ton × 300,000 tons = $858,000.

Therefore, Fehr should include $858,000 of depletion in its cost of goods sold for the year ended December 31, 2015.