Exercise 11-17 Cost of a natural resource; depletion and depreciation; Chapters
ID: 2527313 • Letter: E
Question
Exercise 11-17 Cost of a natural resource; depletion and depreciation; Chapters 10 and 11 [LO11-2, 11-3] Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,200,000 in 2018 for the mining site and spent an additional $640,000 to prepare the mine for extraction of the copper. After the copper is extracted in approximately four years, the company is required to restore the land to its original condition, including repaving of roads and replacing a greenbelt. The company has provided the following three cash flow possibilities for the restoration costs (FV of $1, PV of $1, FVA of $1. PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Cash Outflow Probability 1 340,000 440,000 640,000 15% 45% 40% To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $120,000. After the copper is removed from this mine the equipment will be sold for an estimated residual amount of $16,000. There will be no residual value for the copper mine. The credit-adjusted risk-free rate of interest is 10%. The company expects to extract 10.4 million pounds of copper from the mine. Actual production was 2.0 million pounds in 2018 and 3.4 million pounds in 2019 Required 1. Compute depletion and depreciation on the mine and mining equipment for 2018 and 2019. The units-of-production method is used to calculate depreciation. (The expected format for rounding is presented in the appropriate rows of the table. Round your final answers to nearest whole dollar.) ro Restoration costs: Cash outflow Probability Restoration Cost Possibility1 Possibility 2 Possibility3 15% 45% 40% $ 51,000 198,000 256,000 505,000 PV of $1 4 10% 344,920 $ 340,000 440,000 640,000 Table or Calculator function Present value of probable restoration costs Cost of copper mine Mining site Development cost Restoration cost S 1,200,000 640,000 344,920 Depletion expense (mine): 2018 2019 0.0000 Pounds extracted Depletion expense Depreciation expense (mining equipment) 2018 2019 Depreciation per pound (###) Pounds extracted Depreciation expense 0.00Explanation / Answer
$ Cost of Mine 2184920 Expected Production 10400000 Depletion per pound 0.2101 Depletion Expense (Mine) 2018 2019 Depletion per pound $ 0.2101 0.2101 Pounds Extracted Mn 2 3.4 Depletion expense $ 420200 714340 $ Cost of Mining Equipment 120000 Less: Salvage Value 16000 Cost less salvage value 104000 Expected Production in 4 yrs 10400000 Depreciation per pound 0.0100 Depreciation Expense (Mining eqipment) 2018 2019 Depreciation per pound $ 0.01 0.01 Pounds Extracted Mn 2 3.4 Depreciation expense $ 20000 34000
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