At the beginning of 2017, Kao Company, a small private company, acquired a mine
ID: 2513334 • Letter: A
Question
At the beginning of 2017, Kao Company, a small private company, acquired a mine for $850,000. Of this amount, $100,000 was allocated to the land value and the remaining portion to the minerals in the mine. Surveys conducted by geologists found that approximately 12 million units of ore appear to be in the mine. Kao had $170,000 of development costs for this mine before 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 minerals have been removed was $40,000. During 2017, 2.5 million units of ore were extracted and 2.2 million of these units were sold.
Instructions
(a)The total amount of depletion for 2017 (and prepare the required journal entry, if any)
Explanation / Answer
(a) Depletion per unit = ($850,000 - $100,000 + $170,000 + $40,000) / 12,000,000 = $0.08
Total amount depletion = 2,500,000 * $0.08 = $200,000
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