Question

Crowder Company acquired a tract of land containing an extractable natural resource. Crowder is required by the 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 5,000,000 tons and that the land will have a value of $1,000,000 after restoration. Relevant cost information follows:
Land $9,000,000
Estimated restoration costs 1,500,000
If Crowder maintains no inventories of extracted material, what should be the depletion expense per ton of extracted material?
a. $2.10
b. $1.90
c. $1.80
d. $1.60

Answer 1

Answer:

B) $1.90

Explanation:

total reserves = 5,000,000 tons

value after restoration = $1,000,000

land cost:

land $9,000,000

restoration costs $1,500,000

total depreciable value = $9,000,000 + $1,500,000 - $1,000,000 = $9,500,000

using the units of depletion depreciation method, the depletion expense per ton = total depreciable value / total reserves = $9,500,000 / 5,000,000 tons = $1.90 per ton

this means that for every ton of extracted material, the company must record a $1.90 depletion expense.