Depletion On January 2, 2013, Spring Company purchased land for $500,000, from w
ID: 2556185 • Letter: D
Question
Depletion
On January 2, 2013, Spring Company purchased land for $500,000, from which it is estimated that 430,000 tons of ore could be extracted. It estimates that the present value of the cost necessary to restore the land is $71,000, after which it could be sold for $26,000.
During 2013, Spring mined 80,000 tons and sold 51,000 tons. During 2014, Spring mined 102,000 tons and sold 114,000 tons. At the beginning of 2015, Spring spent an additional $100,000, which increased the reserves by 50,000 tons. In 2015, Spring mined 132,000 tons and sold 132,000 tons. Spring uses a FIFO cost flow assumption.
1. Calculate the depletion included in the income statement and ending inventory for 2013, 2014, and 2015. Round the depletion rate to the nearest cent. If required, round the final answer to the nearest dollar.
2. Complete the natural resources section of the balance sheet on December 31, 2013, 2014, and 2015, assuming that an accumulated depletion account is used. Round the depletion rate per to the nearest cent. If required, round the final answers to the nearest dollar.
December 31, 2013
Mineral ore resources
$
Less: Accumulated depletion
$
December 31, 2014
Mineral ore resources
$
Less: Accumulated depletion
$
$
December 31, 2015
Mineral ore resources
$
Less: Accumulated depletion
$
$
3. Assume Whistler's discount rate was 8%. What is the balance in the asset retirement obligation at 2013, 2014, and 2015? If required, round your answers to the nearest dollar.
December 31, 2013
Mineral ore resources
$
Less: Accumulated depletion
$
$
December 31, 2014
Mineral ore resources
$
Less: Accumulated depletion
$
$
December 31, 2015
Mineral ore resources
$
Less: Accumulated depletion
$
$
Explanation / Answer
1. Depletion is an accrual accounting technique used to allocate the cost of extracting natural resources such as timber, minerals and oil from the earth. Unlike depreciation and amortization, which mainly describe the deduction of expenses due to the aging of equipment and property, depletion is the actual physical depletion of natural resources by companies.
All costs incurred to bring an asset to operating condition are included in the cost of acquisition and are capitalized.Same principle applies to natural resources as well.
In case of natural resource cost includes:
a. Purchase cost of the asset
b. Exploration and drilling costs
c. Extraction and development cost
d. Restoration and rehabilitation costs
So the mine will be stated at $4,69,605 (=5,00,000+71,000?1,01,395) in balance sheet on Dec 31, 2013 but not all of the amount $1,01,395 will be recorded as depletion expense because the company had 29,000 ton of ore unsold at the end of the year.
Here, the depletion expense will be calculated using the following formula:
The net book value for 2014 is $ 4,69,605. With 1,02,000 tons of ore extracted in 2014, the depletion charge will be calculated as following:
Depletion for 2014 = $ 1,29,279
Depletion Expense in income statement for 2014 =$1,07,733
In 2015, the Company spent $ 1,00,000 which increased the reserves by 50,000.
Estimated tons=2,98,000
New Unit Depletion rate= (Book value at beginning of year 2015+additional cost-Residual Value)/Estimated Units/tons
Depletion of mine for year 2015 = $183,527
So the mine will be stated at $2,56,799 (=3,40,326+1,00,000?1,83,527) in balance sheet on Dec 31, 2015 but not all of the amount $1,83,527 will be recorded as depletion expense because the company had 17,000 ton of ore unsold at the end of the year. Here, the depletion expense will be calculated using the following formula:
Depletion Expense in income statement for 2015 =$1,59,891
2.
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