Question

Galt Company acquired a tract of land containing an extractable natural resource. Galt is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 4,000,000 tons, and that the land will have a value of $600,000 after restoration. Relevant cost information follows: Land $6,400,000 Estimated restoration costs 1,200,000.

If Galt maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material?

a. $1.60

b. $1.75

c. $2.00

d. $1.90

Answer 1

b. $ 1.75

Step-by-step explanation:

Computation of depletion per ton

Cost of land $ 6,400,000

Restoration costs $ 1,200,000

Less: Value after restoration $( 600,000)

Depletion cost basis $ 7,000,000

Recoverable reserves 4,000,000 tons

Depletion costs per ton = Depletion cost basis/ Recoverable reserves

$ 7,000,000 / 4,000,000 tons = $ 1.75 per ton

The depletion costs are after considering the restoration costs of the land, and considering the value after restoration.

Answer 2

$1.75.

Step-by-step explanation:

If Galt maintains no inventories, the charge to depletion expense per ton of extracted material in this question will be calculated as:

= (Land + Estimated restoration costs - land value) / Recoverable Reserves

($6,400,000 + $1,200,000 – $600,000) ÷ 4,000,000 = $1.75.