Question

At the beginning of 2017, Novak Company acquired a mine for $2,229,600. Of this amount, $117,000 was ascribed to the land value and the remaining portion to the minerals in the mine. Surveys conducted by geologists have indicated that approximately 11,230,000 units of ore appear to be in the mine. Novak incurred $198,900 of development costs associated with this mine prior to any extraction of minerals. It also determined that the fair value of its obligation to prepare the land for an alternative use when all of the mineral has been removed was $46,800. During 2017, 2,439,000 units of ore were extracted and 2,041,000 of these units were sold.

Compute the following.

  
The total amount of depletion for 2017. (Round per unit answer to 2 decimal places, e.g. 0.45 for computational purpose and final answer to 0 decimal places, e.g. 45,892.)

Depletion for 2017      
$

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The amount that is charged as an expense for 2017 for the cost of the minerals sold during 2017.(Round per unit answer to 2 decimal places, e.g. 0.45 for computational purpose and final answer to 0 decimal places, e.g. 45,892.)

Amount that is charged as an expense for 2017      
$

Answer 1

1. Depletion rate = [ Minecost − Landvalue + Obligation to prepare the land for alternative + Development cost] / Total no. of ore extracted

= [$2,229,600 - $117,000 + $46,800 + $198,900] / 11,230,000 units = $0.21

Total amount of depletion for 2017 = Units of ore were extractedin 2017 x Depletion rate​​
= 2,439,000 units x $0.21 = $512,190

2. Expenses for 2017 for the cost of the minerals sold during 2017​=

= (Total amount of depletion for 2017 / Units of ore were extracted in 2017) x Number of units sold in 2017​

= ($512,190 / 2,439,000) x 2,041,000 = $428,610