Question

Perez Company acquires an ore mine at a cost of $2,380,000. It incurs additional costs of $666,400 to access the mine, which is estimated to hold 1,700,000 tons of ore. 215,000 tons of ore are mined and sold the first year. The estimated value of the land after the ore is removed is $340,000. Calculate the depletion expense from the information given.

Answer 1

Answer:

Depletion expense=$342,000

Explanation:

Total cost of purchasing the ore mine;

Total cost=Purchase cost+access cost

where;

Purchase cost=$2,380,000

Access cost=$666,400

replacing;

Total cost=(2,380,000+666,400)=$3,046,400

Net cost=Total cost-estimated value of land

where;

Total cost=$3,046,400

Estimated value of land=$340,000

replacing;

Net cost=3,046,400-340,000=$2,706,400

Depletion expense=Cost per unit×number of units sold

where;

Cost per unit=(2,706,400/1,700,000)=$1.592 per tonne

Number of units sold=215,000 tons

replacing;

Depletion expense=(1.592×215,000)=$342,000

Depletion expense=$342,000