Question

Porter Resources Company acquired a tract of land containing an extractable natural resource. Porter is required by its 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 2,000,000 tons, and that the land will have a value of $1,000,000 after restoration. Relevant cost information follows:

Land $7,500,000
Estimated restoration costs 1,500,000
If Porter maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material?

Answer 1

A. $4

Explanation:

The computation of amount of depletion per ton is shown below:-

Depletion per ton = (Acquisition cost of land + Estimated restoration costs- Salvage value) ÷ Tons of recoverable reserves

= ($7,500,000 + $1,500,000 - $1,000,000) ÷ 2,000,000 tons

= (9,000,000 - $1,000,000) ÷ 2,000,000 tons

= $8,000,000 ÷ 2,000,000 tons

= $4

Therefore for computing the depletion per ton we simply applied the above formula.