At the beginning of 2014, Aristotle Company acquired a mine for $713,000. Of thi

Question

At the beginning of 2014, Aristotle Company acquired a mine for $713,000. Of this amount, $118,000 was ascribed to the land value and the remaining portion to the minerals in the mine. Surveys conducted by geologists have indicated that approximately 12,040,000 units of the ore appear to be in the mine. Aristotle incurred $200,600 of development costs associated with this mine prior to any extraction of minerals. It also determined that the fair value of its obligation to prepare the land for an alternative use when all of the mineral has been removed was $47,200. During 2014, 2,551,000 units of ore were extracted and 2,191,000 of these units were sold.

Compute the following.

Explanation / Answer

Depletion Expense = (Cost Salvage Value)× Number of Units Extracted/Estimated Number of Units

Cost= 713000+200600-47200=$866400

To figure the property's basis for depletion, subtract all the following from the property's adjusted basis.

The residual value of land and improvements at the end of operations.

The cost or value of land acquired for purposes other than mineral production.In this case land is aquired for mining purpose so we will not deduct the amount

No. of units extracted= 2551000

Estimated units=12040000

Ans A Depletion= 866400*2551000/12040000=$183570.29

But as all the units extracted are not sold so the expense would be less

Cost per tonne=866400/12040000=$.07196 per tonne $.07

so 2191000 units are sold

Ans B the amount of expense would be= 2191000*.07=$157664.65 (in answer I have used .07196 to know the exact amount)

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