[Review] Pemke purchased land with a mineral deposit (bauxite) at a cost of $1,5

Question

[Review] Pemke purchased land with a mineral deposit (bauxite) at a cost of $1,500,000 Also, Pemke paid $100,000 in back taxes to obtain clear title to the land. The salvage value of the land (after bauxite is removed) is expected to be $250,000. Pemke expects to mine 2,000,000 tons of bauxite from this deposit. Under the units-of-production method, the depletion expense per each ton of bauxite mined is: See the textbook illustrations for "units-of-production" depletion. O $0.675 O $8.00. O $0.625 O$6.00. o $0.875.

Explanation / Answer

Depletion base = total acquisition costs = cost + taxes = 1500000 + 100000 = $1,600,000

Salvage value = $250,000

Total units recovered = 2,000,000

units of production depletion expense = (depletion base - salvage value)/ total units recovered

= (1600000 - 250000)/2000000

= 1350000/2000000

= 0.675

Ans: option 1 = $0.675

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