It is estimated that the recovery of the ore will take 10 years and that after the ore is fully depleted the land will be sold for a market value of $200,000. In 2018, Frederick extracted and sold 125,000 tons of ore. What is the amount of depletion that should be recorded? Round total the nearest whole dollar.

Frederick Mining Company owns a large parcel of land which costs $950,000. It is estimated to contain 1,800,000 tons of recoverable ore. It is estimated that the recovery of the ore will take 10 years and that after the ore is fully depleted the land will be sold for a market value of $200,000. In 2018, Frederick extracted and sold 125,000 tons of ore. What is the amount of depletion that should be recorded? Round total to the nearest whole dollar.

Depletion  =  ($950,000 - $200,000)  x 125,000  =  $52,083

                              1,800,000

Explanation:

step 1 : determine the depletion using quantity produced method

step 2 : deduct the scrap value from the cost of the land

step 3: divide the result in  step 2 by the total estimated recoverable tons of ore in order to determine the depletion per ton of ore

step 4 : multiply the depletion per ton of ore with the number of ton of ore produced during the year 2018.

Answer

DEPLETION EXPENSE  

It is beyond our capabilities to be able to know with accuracy and certainty how much resources are below the earth’s surface before they are extracted. These resources include Natural resources like oil, natural gas, and coal are drilled or mined from the ground. That is why GAAP requires that natural resources be capitalized at cost initially. The purchase price or cost of the resources, mineral rights, and anything needed to prep the area for extraction is then allocated over the period they are consumed.

The depletion equation is calculated in a different manner compared to a typical depreciation formula used in accounting, reason being  you have to first figure out an average price per unit first. To calculate the depletion per unit you take the total cost less salvage value and divide it by the total number of estimated units.

The expense is calculated by multiplying the depletion per unit by the number of units consumed or sold during the current period

Loss = ($300)

2) Depletion expense = $70,313

Explanation:

1) The calculation of gain/loss is shown below:

Depreciation per year = (Cost - Salvage value)/useful life

= ($22,500 - $1,000)/5

= $4,300

Accumulated depreciation at the time of sales = Depreciation per year * number of years

= $4,300 * 4

= $17,200

Book value at the time of sales = Original cost - Accumulated depreciation at the time of sales

= $22,500 - $17,200

= $5,300

Gain/Loss = Selling price - Book value at the time of sales

= $5,000 - $5,300

= ($300) loss

2) The calculation of depletion expense is shown below:

Depletion expense = [(Original Cost-Salvage value)/Total tons extracted] * Tons extracted in the year

= [($1,100,000 - $200,000)/1,600,000] *125,000

= $70,312.5

Or $70,313.

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