Galt Company acquired a tract of land containing an extractable natural resource

Question

Galt Company acquired a tract of land containing an extractable natural resource. Galt is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 4,000,000 tons, and that the land will have a value of $600,000 after restoration. Relevant cost information follows: Land $6,400,000 Estimated restoration costs 1,200,000.

If Galt maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material?

a. $1.60

b. $1.75

c. $2.00

d. $1.90

Explanation / Answer

Depletible cost = ($6400000 + $1200000) - $600000 = $7000000

Reserves = 4000000 tons

Depletion expense = $7000000 / 4000000 tons = $1.75 per ton

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