At the beginning of 2017, Blossom Company acquired a mine for $2,159,000. Of thi

ID: 2518221 • Letter: A

Question

At the beginning of 2017, Blossom Company acquired a mine for $2,159,000. 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 7,080,000 tons of the ore appear to be in the mine. Blossom incurred $59,000 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 $24,000. During 2017, 1,420,000 units of ore were extracted and 1,180,000 of these units were sold.

Compute the following.

Indigo Corporation purchased a new machine for its assembly process on August 1, 2017. The cost of this machine was $120,258. The company estimated that the machine would have a salvage value of $13,158 at the end of its service life. Its life is estimated at 5 years, and its working hours are estimated at 22,800 hours. Year-end is December 31.

Compute the depreciation expense under the following methods. Each of the following should be considered unrelated. (Round depreciation rate per hour to 2 decimal places, e.g. 5.35 for computational purposes. Round your answers to 0 decimal places, e.g. 45,892.)

Explanation / Answer

Blossom Company

Depletion = depletion rate per unit x number of units extracted in 2017

Depletion rate per unit = total cost of mine/estimated number of units

Total cost of mine –

acquisition cost

$2,159,000

Add: development cost

$59,000

Add: fair value of obligation to prepare the land after use

$24,000

$2,242,000

Less: Cost of land

$118,000

Cost of mine

$2,124,000

Estimated number of units = 7,080,000 tons

Depletion cost per unit = $2,124,000/7,080,000 = $0.30

Number of units extracted in 2017 = 1,420,000

Depletion expense for 2017 = 1,420,000 x 0.3 = $426,000

Hence, depletion for 2017 = $426,000

= Number of units of ore sold x 0.3

Number of units of ore sold = 1,180,000 units

Amount charged as an expense for 2017 = 1,180,000 x 0.3 =$354,000

Indigo Corp

Depreciation expense = depreciation base x 1/useful life

Depreciation base = cost – salvage value

Cost = $120,258

Salvage value = $13,158

Useful life = 5 years

Depreciable base = $120,258 - $13,158 = $107,100

Depreciation expense = $107,100/5 = $21,420

Since the asset is purchased on August 1, 2017, depreciation expense is charged only for 5 months of August, 2017 – December 2017.

Hence, depreciation expense for 2017 = $21,420 x 5/12 = $8,925

Depreciation expense = (depreciation base x depreciation rate) x machine hours use

Depreciation base = cost – salvage value= $120,258 – 13,158 = $107,100

Depreciation rate per hour = 1/estimated hours = 107,100/22,800 hours

Depreciation expense for 2017 = ($107,100/22,800) x 830 hours

Hence, depreciation expense for 2017 = $3,899

Depreciation percentage = the year/sum of the year percentage

Sum of the year percentage= n (n+1)/2

We have, n = 5 years

= 5 (5+1)/2 = 30

Depreciation percentage = remaining estimated life at the beginning of the year x SYD

Depreciation percentage = 3/15 = 1/5 = 20%

Depreciation expense, 2018 = cost x depreciation percentage

= depreciable base x depreciation percentage

Depreciable base = cost – salvage value

= $120,258 – 13,158 = $107,100

Depreciation expense = $107,100 x 20% = $21,420

Depreciation expense = cost x depreciable rate

Depreciable rate = 2 x 1/useful life

= 2 x 1/5 = 40%

Depreciation expense for 2017 = 120,258 x 40% = $48,103

Depreciation expense for 2018 = book value x depreciation rate

Book value = cost – accumulated depreciation

= $120,258 - $48,103 = $72,155

Depreciation expense for 2018 = 72,155 x 40% = $28,862

Hence, depreciation expense for 2018 under double declining balance method = $28,862