Question

In January, 2020, Sheffield Corporation purchased a mineral mine for $5400000 with removable ore estimated by geological surveys at 1800000 tons. The property has an estimated value of $300000 after the ore has been extracted. The company incurred $1600000 of development costs preparing the mine for production. During 2020, 590000 tons were removed and 540000 tons were sold. What is the amount of depletion that Sheffield should expense for 2020?

Answer 1

Solution:

Here,

Cost of mine = $5,400,000

Salvage value/ Estimated value = $300,000

Development costs = $1,600,000

Estimated number of units = 1,800,000 tons of ore

Units extracted and sold in period = 540,000 tons of ore

Now,

Depletion per unit = (Cost of mine + Development costs - Estimated value of mine) / Estimated no. of units

   = ($5,400,000 + $1,600,000 - $300,000) / 1,800,000 tons of ore

= $6,700,000 / 1,800,000

= $3.72

Depletion Expense = Depletion per unit * Units extracted and sold

= $3.72 * 540,000 tons of ore

= $2,010,000

Therefore,Sheffield Corporation should amount $2,010,000 as depletion expense for 2020