Answer:
The answers are:
1. $900,000 (a.)
2. $50,000 (b.)
3. $6,750 (b.)
4. $27,000 (d)
Step-by-step explanation:
1. First of all, let us lay out the information required for calculation:
cost price of pit = $2,800,000
amount of gravel that can be extracted = 8,000,000 tons
residual value = $400,000
amount of gravel extracted in first year = 3,000,000 tons
depletion expense recorded in first year = $ ????
First, we have to find the unit cost of one ton of gravel by dividing the difference between the cost of gravel and residual value by the amount of gravel extracted during the useful life.
cost of 1 ton of gravel = (cost of pit - residual value) ÷ amount of gravel that can be extracted.
= (2,800,000 - 400,000) ÷ 8,000,000 = 2,400,000 ÷ 8,000,000 = $0.3 per ton of gravel. (this means that for every ton of gravel that is extracted, the depletion expense is $0.3)
Next, we know the depletion expense for 1 ton, since 3 million tons are extracted during the year, the depletion expense recorded is:
1 ton = $0.3
∴ 3,000,000 tons = 0.3 × 3,000,000 = $900,000 (a.)
2. Depreciation is a cost allocation method on fixed assets that lose value during the period of usage, and straight-line depreciation method distributes the depreciation evenly over the useful life of the asset as follows
straight-line depreciation formula = (asset cost - salvage value) ÷ useful life
= (250,000 - 50,000) ÷ 4 = 200,000 ÷ 4 = $50,000 (b.)
3. Double-decline balance depreciation is an accelerated depreciation that applies twice the depreciation rate to the cost of asset, during the years of the utilization of the asset. It is calculated as:
Double-decline balance = 2 × value of asset × depreciation rate.
Depreciation rate = reciprocal of useful life of asset
= 1 ÷ useful life = 1 ÷ 8 = 0.125
Double-decline balance formula = (2 × depreciation rate) × value of asset
(2 × depreciation rate)= 2 × 0.125 = 0.25
∴ year 1 Double-decline balance formula = 0.25 × 48,000 = $12,000
value at end of year 1 (beginning of year 2) = 48,000 - 12,000 = $36,000
year 2 depreciation = 0.25 × 36,000 = $9,000
year 2 end value (year 3 beginning value) = 36,000 - 9,000 = $27,000
Year 3 depreciation = 0.25 × 27,000 = $6,750 (b.)
4. after appraisal, ratio of land appraisal to building appraisal
= 30,000 : 70,000 = 3 : 7
this means that for every 10 unit of price, the land will take 3 out of 10, while the building will take 7 out of 10.
cost of land and building = $90,000
since we know the ratio of land to building the can allocate the cost of land as follows:
ratio of land to building = 3 : 7
∴ for a combined price of $90,000, land takes 3 out of every 10 parts of the $90,000
= (3/10) × 90,000 = 0.3 × 90,000 = $27,000
Therefore out of the $90,000 the land costs $27,000 (c.)