In 2013, the Marion Company purchased land containing a mineral mine for $1,950,

Question

In 2013, the Marion Company purchased land containing a mineral mine for $1,950,000. Additional costs of $792,000 were incurred to develop the mine. Geologists estimated that 470,000 tons of ore would be extracted. After the ore is removed, the land will have a resale value of $110,000. To aid in the extraction, Marion built various structures and small storage buildings on the site at a cost of $192,700. These structures have a useful life of 10 years. The structures cannot be moved after the ore has been removed and will be left at the site. In addition, new equipment costing $84,900 was purchased and installed at the site. Marion does not plan to move the equipment to another site, but estimates that it can be sold at auction for $5,000 after the mining project is completed. In 2013, 57,000 tons of ore were extracted and sold. In 2014, the estimate of total tons of ore in the mine was revised from 470,000 to 557,500. During 2014, 87,000 tons were extracted, of which 67,000 tons were sold. Required: 1. Compute depletion and depreciation of the mine and the mining facilities and equipment for 2013 and 2014. Marion uses the units-of-production method to determine depreciation on mining facilities and equipment. 2. Compute the book value of the mineral mine, structures, and equipment as of December 31, 2014.

Explanation / Answer

Part 1)

The calculations for depletion and depreciation have been given below:

Mineral Mine:

The cost of mineral mine would comprise of purchase price and development cost. Therefore, the total cost of the mineral mine would be $2,742,000 (1,950,000 + 742,000).

2013:

The formula for calculating depletion is given below:

Depletion Rate Per Ton = (Cost - Resale Value)/Total Ore Expected to be Produced = (2,742,000 - 110,000)/470,000 = $5.6 per tonne

Depletion Value = Ore Extracted in 2013*Depletion Rate Per Ton = 57,000*5.60 = $319,200

__________

2014:

Depletion Rate Per Ton = (Cost - 2013 Depletion - Resale Value)/(Revised Ore Expected to be Produced - Ore Produced in 2013) = (2,742,000 - 319,200 - 110,000)/(557,500 - 57,000) = $4.62

Depletion Value = Ore Extracted in 2014*Depletion Rate Per Ton = 87,000*4.62 = $402,025.20 or $402,025

________________

Structures:

2013:

Depreciation Rate Per Ton = Cost/Total Ore Expected to be Produced = 192,700/470,000 = $.41 per ton

Depreciation Value = Ore Extracted in 2013*Depreciation Rate Per Ton = 57,000*.41 = $23,370

__________

2014:

Revised Depreciation Rate = (Cost - 2013 Depreciation Value)/(Revised Ore Expected to be Produced - Ore Produced in 2013) = (192,700 - 23,370)/(557,500 - 57,000) = $.34

Depreciation Value = Ore Extracted in 2013*Revised Depreciation Rate Per Ton = 87,000*.34 = $29,434

________________

Equipment:

2013:

Depreciation Rate Per Ton = (Cost - Sale Value)/Total Ore Expected to be Produced = (84,900 - 5,000)/470,000 = .17 per ton

Depreciation Value = Ore Extracted in 2013*Depreciation Rate Per Ton = 57,000*.17 = $9,690

__________

2014:

Revised Depreciation Rate = (Cost - 2013 Depreciation Value - Sale Value)/(Revised Ore Expected to be Produced - Ore Produced in 2013) = (84,900 - 9,690 - 5,000)/(557,500 - 57,000) =.14 per ton

Depreciation Value = Ore Extracted in 2013*Depreciation Rate Per Ton = 87,000*.14 = $12,204.34 or $12,204

________________________

Part B)

The book value has been calculated with the use of table given below:

Notes:

There can be a difference in final answers on account of rounding off figures.

Asset Cost (A) Depletion/Depreciation 2013 (B) Depletion/Depreciation 2014 (C) Book Value as on 31st Dec 2014 Mineral Mine 2,742,000 319,200 402,025 $2,020,775 Structures 192,700 23,370 29,434 $139,896 Equipment 84,900 9,690 12,204 $63,006

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