Exercise 11-17 Cost of a natural resource; depletion and depreciation; Chapters
ID: 2582158 • Letter: E
Question
Exercise 11-17 Cost of a natural resource; depletion and depreciation; Chapters 10 and 11 [LO11-2, 11-3] Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,600,000 in 2018 for the mining site and spent an additional $720,000 to prepare the mine for extraction of the copper. After the copper is extracted in approximately four years, the company is required to restore the land to its original condition, including repaving of roads and replacing a greenbelt. The company has provided the following three cash flow possibilities for the restoration costs (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.): Cash Outflow Probability 1 $ 420,000 25% 2 520,000 45% 3 720,000 30% To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $140,000. After the copper is removed from this mine, the equipment will be sold for an estimated residual amount of $28,000. There will be no residual value for the copper mine. The credit-adjusted risk-free rate of interest is 15%. The company expects to extract 11.2 million pounds of copper from the mine. Actual production was 2.8 million pounds in 2018 and 4.2 million pounds in 2019.
Required: 1. Compute depletion and depreciation on the mine and mining equipment for 2018 and 2019. The units-of-production method is used to calculate depreciation. (The expected format for rounding is presented in the appropriate rows of the table. Round your final answers to nearest whole dollar.)
Explanation / Answer
Answer.
Compute Depreciation Using units of production Method for 2018-2019
Depreciation per pound 2018 = Cost-Residual Value
Estimated Extractable Pounds
$1600000+$720000-$0
11200000
= $0.207
=$ 0.207*15/100
=$ 3.105
Depletion for 2018 = 2800000 x $3.105
= $8694000
Depletion for 2019
= 4200000 x $3.105
= $13041000
Equipment for 2019
Depletion = Cost-Residual Value
Estimated Extractable Pounds
= $140000-$28000
11200000
=$0.15 Per Pound
Depletion of mines for 2019 = 2800000 x $$0.15
= $420000
Depletion for 2019 = 4200000 x $0.15
=$630000
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