Question

On January 1, Year 1, Gemstone Mining Company (GMC) paid $10,500,000 cash to purchase the rights to extract raw stone from a surface pit estimated to hold 50,000 tons of useable material. GMC extracted 10,000 tons of stone in Year 1, 20,000 tons of stone in Year 2, and 25,000 tons of stone in Year 3. The rights to the surface pit were expected to have a $500,000 salvage value at the end of Year 3. Based on this information, the amount of depletion expense shown on the Year 3 income statement is:_______

Answer 1

the amount of depletion expense shown on the Year 3 income statement is $ 12,500,000

Step-by-step explanation:

Depletion Unit Method record the Depletion expense for usage of Assets such as Mines, Quarries and Oil Wells.

Depletion Expense = Cost of Asset/ Expected Total Contents in Units × Number of Units taken in the Period

Year 1

Depletion Expense = $10,500,000 / 50,000 tons × 10,000 tons

= $ 2,100,000

Year 2

Depletion Expense = $10,500,000 / 50,000 tons × 20,000 tons

= $ 4,200,000

Year 3

New Information received : The rights to the surface pit were expected to have a $500,000 salvage value at the end of Year 3

Hint : Adjust the depletion expense as if it happened at beginning of the year

1.Adjust the Cost with the Salvage Value

2.Adjust the Remaining Number of Units

Depletion Expense = $10,500,000 -$500,000/ 50,000 tons - 30000 tons × 25,000 tons

= $ 10,000,000 / 20,000 tons × 25,000 tons

= $ 12,500,000