Question

Zvinakis Mining Company paid $200,000 for the rights to mine lead in southeast Missouri. The cost to drill and erect a mine shaft was $2,400,000, and equipment to process the lead ore before shipment to the smelter was $1,800,000. The mine is expected to yield 2,000,000 tons of ore during the five years it is expected to be operating. The equipment has an estimated residual value of $150,000 when mining is concluded. The mine started operations on April 30, 2021. In 2021, 300,000 tons of ore were extracted, and in 2022, 700,000 tons were mined.

Required:
a. Compute the depletion and rate the units-of-production depreciation rate.
b. Compute depletion and depreciation for 2013 and 2014.

Answer 1

The answer is given below;

Step-by-step explanation:

2021 2022

a. Units of production 300,000 700,000

Mine Rights $200,000 $200,000

Depletion rate on mine rights

(200,000/2,000,000) .1 .1

Depletion rate on mine shaft

(2,400,000/2,000,000) 1.2 1.2

b. Depletion on mine

.1*300,000 30,000

.1*700,000 70,000

Depletion on mine shaft

(2,400,000/2,000,000)*300,000 360,000

(2,400,000/2,000,000)*700,000 840,000

Depreciation on equipment

(1,800,000-150,000)/5 330,000 330,000

Answer 2

1.

Depletion rate per ton $1.30

Depreciation rate per ton $0.825

2.

Depletion Expense for 2021 is 390,000

Depletion Expense for 2022 is $910,000

Depreciation Expense for 2021 is $247,500

Depreciation Expense for 2022 is $577,500

$577,500

Step-by-step explanation:

1.

Depletion

Depletion is an estimated cost of a natural resource that is extracted in the period. This resource is expensed as the extraction is made.

Depletion base = Mineral rights + Mine shaft

Depletion base = $200,000 + $2,400,000

Depletion base = $2,600,000

Recoverable ore = 2,000,000 tons

Depletion rate = Depletion base / Recoverable ore (tons)

Depletion rate = $2,600,000 / 2,000,000 tons

Depletion rate = $1.30 per ton

Depletion rate per ton $1.30

Depreciation

Depreciation is the reduction in the value of the asset due to the physical wear and tear of a fixed asset. A fixed assets losses its value as it is being used.

Mining equipment value = $1,800,000

Residual value = $150,000

Depreciable Value = Mining equipment value - Residual value

Depreciable Value = $1,800,000 - $150,000

Depreciable Value = $1,650,000

Recoverable ore = 2,000,000 tons

Depreciable rate = $1,650,000 / 2,000,000 tons

Depreciation rate per ton $0.825

2.

Depletion = Extraction for the period x Depletion Rate

Depletion 2021 = 300,000 x $1.30 = $390,000

Depletion 2022 = 700,000 x $1.30 = $910,000

Depreciation = Extraction for the period x Depreciation Rate

Depreciation 2021 = 300,000 x $0.825 = $247,500

Depreciation 2022 = 700,000 x $0.825 = $577,500