Answer
DEPLETION EXPENSE
It is beyond our capabilities to be able to know with accuracy and certainty how much resources are below the earth’s surface before they are extracted. These resources include Natural resources like oil, natural gas, and coal are drilled or mined from the ground. That is why GAAP requires that natural resources be capitalized at cost initially. The purchase price or cost of the resources, mineral rights, and anything needed to prep the area for extraction is then allocated over the period they are consumed.
The depletion equation is calculated in a different manner compared to a typical depreciation formula used in accounting, reason being you have to first figure out an average price per unit first. To calculate the depletion per unit you take the total cost less salvage value and divide it by the total number of estimated units.
The expense is calculated by multiplying the depletion per unit by the number of units consumed or sold during the current period
Loss = ($300)
2) Depletion expense = $70,313
Explanation:
1) The calculation of gain/loss is shown below:
Depreciation per year = (Cost - Salvage value)/useful life
= ($22,500 - $1,000)/5
= $4,300
Accumulated depreciation at the time of sales = Depreciation per year * number of years
= $4,300 * 4
= $17,200
Book value at the time of sales = Original cost - Accumulated depreciation at the time of sales
= $22,500 - $17,200
= $5,300
Gain/Loss = Selling price - Book value at the time of sales
= $5,000 - $5,300
= ($300) loss
2) The calculation of depletion expense is shown below:
Depletion expense = [(Original Cost-Salvage value)/Total tons extracted] * Tons extracted in the year
= [($1,100,000 - $200,000)/1,600,000] *125,000
= $70,312.5
Or $70,313.