Question

Mack Company acquired property for $20,000,000 containing platinum ore mine on January 1, 2019. Mack estimated that the mine would produce 500,000 tons of ore and once mining is completed, the property could be sold for $200,000. During 2019, 2020, and 2021, Mack recovered 25,000, 50,000, and 125,000 tons of ore, respectively. As a result, the mine should appear on Mack’s balance sheet at December 31, 2021 at what amount (net of depletion)?

Select one:

A. $12,000,000

B. $8,000,000

C. $11,880,000

D. $12,080,000

Answer 1

Answer : option D

Explanation:

In the net of depletion method , depletion is charged based on units of usage. For that depletion rate is to be computed.

Depletion rate= (depletion base- salvage value)÷total units to be produced

In the above question

Depletion base= 20,000,000

Salvage value = 200,000

Estimated units to be produced = 500,000 tons

Depletion rate= (20,000,000- 200,000)÷ 500,000 = 39.6

In 2019 , ore recovered= 25000 tons

In 2020, ore recovered= 50000 tons

In 2021, ore recovered = 125000 tons

Total depletion = total units recovered*depletion rate= (25000+50000+125000)* 39.6 = 7920000.

Therefore amount of mine appearing in the balance sheet at December 31, 2021= 20,000,000- 7,920,000= 12,080,000