During 2010, a company purchased a mine at a cost of $4,116,000. The company spe

ID: 2503944 • Letter: D

Question

During 2010, a company purchased a mine at a cost of $4,116,000. The company spent an additional $720,000 getting the mine ready for its intended use. It is estimated that 420,000 tons of mineral can be removed from the mine and the residual value of the mine will be $720,000. During 2010, 57,000 tons of mineral were removed from the mine and 47,000 tons were sold. Which of the following statements is correct with respect to the accounting for the mine?

a)The 2010 net income decreased $558,600 as a result of the mining during the year.

b)The book value of the mine decreased $460,600 during 2010.

c)The inventory of minerals increased $558,600 during 2010.

d)The 2010 cost of goods sold was $460,600.

a)The 2010 net income decreased $558,600 as a result of the mining during the year.

b)The book value of the mine decreased $460,600 during 2010.

c)The inventory of minerals increased $558,600 during 2010.

d)The 2010 cost of goods sold was $460,600.

Explanation / Answer

Hi,

Please find the answer as follows:

Depletion Rate Per Ton = (Cost of the Mine + Additional Expenditure - Residual Value)/Tons of Mineral that can be Extracted = (4116000 + 720000 - 720000)/420000 = 9.8 per ton

Cost of Goods Sold = Tons of Mineral Sold*Depletion Rate Per Ton = 47000*9.8 = 460600

Option D (The 2010 cost of goods sold was $460,600) is the correct answer.

Thanks.

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