Question

On April 17, 2021, the Loadstone Mining Company purchased the rights to a coal mine. The purchase price plus additional costs necessary to prepare the mine for extraction of the coal totaled $4,950,000. The company expects to extract 990,000 tons of coal during a four-year period. During 2021, 249,000 tons were extracted and sold immediately.Required:

1. Calculate depletion for 2021.
2. Is depletion considered part of the product cost and included in the cost of inventory?

Answer 1

1. Depletion for 2021 will be derived if the "tons which were extracted and sold immediately" is divided by "the Depletion per ton"

Depletion for 2021 = Extracted and sold tons in 2021 / depletion per ton

Depletion for 2021 = 249,000 tons * $5 per tons

Depletion for 2021 = $1,245,000

Where as the depletion per ton is be derived when the purchase price plus additional costs necessary is divided extract of tons of coals during the 4 year period.

Depletion per ton = $4,950,000 / 990000

Depletion per ton = $5 per ton

2. Depletion is not considered as part of product cost. It is shown as expense on income statement and reduced from the value of natural resource. So it is equivalent to depreciation of assets.