Question

QS 8-11 Natural resources and depletion LO P3 Perez Company acquires an ore mine at a cost of $1,400,000. It incurs additional costs of $400,000 to access the mine, which is estimated to hold 1,000,000 tons of ore. 180,000 tons of ore are mined and sold the first year. The estimated value of the land after the ore is removed is $200,000. Calculate the depletion expense from the information given. 1.

Answer 1

$288,000

Step-by-step explanation:

Cost = $1,800,000 ($1,400,000+$400,000)

Salvage value = $200,000

Amount subject to depletion = Cost - Salvage value

Amount subject to depletion = $1,800,000 - $200,000

Amount subject to depletion = $1,600,000

Total units of capacity = 1,000,000 tons

Depletion per unit = Amount subject to depletion / Total units of capacity

Depletion per unit = $1,600,000 / 1,000,000 tons

Depletion per unit = $1.6 per unit

Units extracted and sold in period = 180,000 tons

Depletion expense = Units extracted and sold in period * Depletion per unit

Depletion expense = 180,000 tons * $1.6 per unit

Depletion expense = $288,000