Question

McManus Mining Inc., headquartered in Phoenix, Arizona, is "a premier U.S.-based natural resource company with an industry leading global portfolio of mineral assets, significant oil and natural gas resources and a growing production profile." At the end of a recent year, its assets include approximately 104 billion pounds of copper, 29 million ounces of gold, 3 billion pounds of molybdenum, 283 million ounces of silver, 860 million pounds of cobalt, and 390 million barrels of estimated oil and natural gas reserves. Its annual revenues exceed $21.4 billion.

Assume that in February 2016, McManus Mining paid $709,000 for a mineral deposit in Indonesia. During March, it spent $219,030 in preparing the deposit for exploitation. It was estimated that 901,000 total cubic yards could be extracted economically. During 2016, 73,000 cubic yards were extracted. During January 2017, the company spent another $21,000 for additional developmental work that increased the estimated productive capacity of the mineral deposit.

Required:

1. Compute the acquisition cost of the deposit in 2016.

2. Compute depletion for 2016. (Do not round intermediate calculations.)

3. Compute the net book value of the deposit after payment of the January 2017 developmental costs. (Do not round intermediate calculations.)

Answer 1

Solution 1:

Acquistiong cost of mineral deposit in 2016 = Purchase cost of mineral deposit + cost of preparing the deposit for exploitation = $709,000 + $219,030 = $928,030

Solution 2:

Depletion for 2016 = Acquisition cost * Mineral extracted in 2016 / Total expected extraction from deposit

= $928,030 * 73000/901000 = $75,190

Solution 3:

Net book value of deposit after payment of the January 2017 developmental costs = ($928,030 - $75,190 + $21,000) = $873,840