(Depletion and Depreciation—Mining) Khamsah Mining Company has purchased a tract
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Question
(Depletion and Depreciation—Mining) Khamsah Mining Company has purchased a tract of
mineral land for $900,000. It is estimated that this tract will yield 120,000 tons of ore with sufficient mineral
content to make mining and processing profitable. It is further estimated that 6,000 tons of ore will be
mined the first and last year and 12,000 tons every year in between. (Assume 11 years of mining operations.)
The land will have a salvage value of $30,000.
The company builds necessary structures and sheds on the site at a cost of $36,000. It is estimated that
these structures can serve 15 years but, because they must be dismantled if they are to be moved, they have
no salvage value. The company does not intend to use the buildings elsewhere. Mining machinery installed
at the mine was purchased secondhand at a cost of $60,000. This machinery cost the former owner $150,000
and was 50% depreciated when purchased. Khamsah Mining estimates that about half of this machinery will
still be useful when the present mineral resources have been exhausted, but that dismantling and removal
costs will just about offset its value at that time. The company does not intend to use the machinery elsewhere.
The remaining machinery will last until about one-half the present estimated mineral ore has been
removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery.
(a) As chief accountant for the company, you are to prepare a schedule showing estimated depletion
and depreciation costs for each year of the expected life of the mine.
(b) Also compute the depreciation and depletion for the first year assuming actual production of 5,000
tons. Nothing occurred during the year to cause the company engineers to change their estimates of
either the mineral resources or the life of the structures and equipment.
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Explanation / Answer
(a)
1. Depletion
Amount to be depleted = Cost of land – Residual value of land= $900,000 - $30,000 = $870,000
Estimated yield of ore over 11 years = 120,000 tons
Depletion per ton of ore = $870,000 / 120,000 = $7.25 per ton of ore
Year 1
Year 2 – Year 10
Year 11
Estimated Yield
6,000 tons
12,000 tons
6,000 tons
Estimated depletion ($7.25 per ton)
$43,500
$87,000
$87,000
2. Depreciation
Asset
Cost
Estimated Yield
Depreciation Per ton
Year 1
Year 2 – Year 5
Year 6
Year 7 – Year 10
Year 11
Building
$36,000
120,000 tons
$0.30
$1,800
$3,600
$3,600
$3,600
$1,800
Machinery (1/2)
$30,000
120,000 tons
$0.25
$1,500
$3,000
$3,000
$3,000
$1,500
Machinery (1/2)
$30,000
60,000 tons
$0.50
$3,000
$6,000
$3,000
0
0
(b)
Depletion of mineral land = $7.25 * 5000 tons = $36,250
Depreciation
Building = $0.30 * 5000 tons = $1,500
Machinery =$0.25 * 5000 tons = $1,250
Machinery = $0.50 * 5000 tons = $2,500
Total Depreciation = $5,250
Year 1
Year 2 – Year 10
Year 11
Estimated Yield
6,000 tons
12,000 tons
6,000 tons
Estimated depletion ($7.25 per ton)
$43,500
$87,000
$87,000
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