Question

A firm began a mineral exploitation venture during the current year by spending (1) $40 million for the mineral rights; (2) $100 million exploring for the minerals, one-fourth of which were successful; and (3) $60 million to develop the site. Management estimated that 20 million tons of ore would ultimately be removed from the property. Wages and other extraction costs for the current year amounted to $10 million. In total, 2 million tons of ore were removed from the deposit in the current year. The entire production for the period was sold. Compute cost of goods sold under the successful efforts method.

(A) $30 million
(B) $12.5 million
(C) $10 million
(D) $22.5 million

Answer 1

D) $22.5 Million

Explanation:

To calculate the cost of goods sold of minerals we first need to compute the depletion cost.

• Calculate Cost depletion:

Formula:
`(APV)/(TR)`× U

Where:

APV = Adjusted property Value.

TR = Total reserves.

U = Units extracted in a given period.

Data:

1. APV: [$40 + (0.25 × $100) + $60] = 125,000,000
2. TR: $20 million tons
3. U: 2 million tons.

Putting values in the formula:

Depletion cost =
`(125,000,000)/(20,000,000)`× 2,000,000 = 12,500,000

• Calculate costs of goods sold:

CGS = (Depletion cost + wages and extraction costs)

CGS = 12,500,000 + 10,000,000 = $22,500,000‬

• The wages and other cost wasn't included in Depletion cost because it is an inventory cost which is supposed to be included in the cost of goods sold.