Ex. 3-Depletion allowance.(14 pts) Mareos Company purchased for $3,800,000 a min

Question

Ex. 3-Depletion allowance.(14 pts) Mareos Company purchased for $3,800,000 a mine estimated to contain 2 million tons of ore. When the ore is completely extracted, it was expected that the land would be worth $200,000. A building and equipment costing $1,800,000 were constructed on the mine site, and they will be completely used up and have no salvage value when the ore is exhausted. During the first year, 750,000 tons of ore w d, and $300,000 was spent for labor and other operating costs. For the second year 900,000 tons of ore were extracted and $360,000 was spent for labor and other operating costs. Instructions Compute the total cost per ton of ore mined in the first and second years. (Show computations by setting up a schedule giving cost per ton.) First year: tem Base $3,600,000 Ore Building and Equipment 2,000,000 2,000,000 750,000 1,800,000 Labor and Operating Expenses 300,000 Total Cost Total depletion cost for the first year: Second year: Tons 2,000,000 2,000,000 900,000 te Ore Building and Equipment Labor and Operating Expenses $3,600,000 1,800,000 360,000 Total Cost Total depletion cost for the second year

Explanation / Answer

Depletion is relating to the cost of mine.

Depreciation of the building and equipment:

Since the estimated life of the assets is dpendent on the existence of the ore in the mine, we have to calculate the depreciation based on the units of production method, for which we have aleady calculated the rate per ton of ore as $0.90 .

Depreciation for the first year = 750,000 x 0.90 = $67,500

Depreciation for the first year = 900,000 x 0.90 = $81,000

Labor and operating costs will be expensed during the years in which they are incurred.

First Year Base Tons Per Ton Ore 3600000 2000000 $1.80 Building and Euipment 1800000 2000000 $0.90 Labor and operating Expenses 300000 750000 $0.40 Total Cost $3.10 Total Depletion cost for the year 750,000 x 1.80 = 1,350,000 Second Year Base Tons Per Ton Ore 3600000 2000000 $1.80 Building and Euipment 1800000 2000000 $0.90 Labor and operating Expenses 360000 900000 $0.40 Total Cost $3.10 Total Depletion cost for the year 900,000 x 1.80 = 1,620,000

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