Question

At the beginning of 2020, Pronghorn Company acquired a mine for $1,732,800. Of this amount, $112,000 was ascribed to the land value and the remaining portion to the minerals in the mine. Surveys conducted by geologists have indicated that approximately 11,600,000 units of ore appear to be in the mine. Pronghorn incurred $190,400 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 $44,800. During 2020, 2,718,000 units of ore were extracted and 2,310,000 of these units were sold.
Required:
a. Compute the total amount of depletion for 2020.
b. Compute the amount that is charged as an expense for 2014 for the cost of the minerals sold during 2020.

Answer 1

Answer: a. $434880

b. $369,600

Explanation:

a. Compute the total amount of depletion for 2020.

Depletion Rate can be calculated as:

= (Mine cost - Value of land + Obligation + Development cost)/Ore extracted

= ($1,732,800 - $112,000 + $44,800 + $190,400)/$11,600,000

= $1856000/$11600000

= 0.16

Total amount of depletion for 2020 will now be calculated as:

= Depletion Rate × Ore extracted

= 0.16 × 2,718,000

= $434880

b. Compute the amount that is charged as an expense for 2014 for the cost of the minerals sold during 2020.

This will be calculated as the totsl depletion for 2014 divided by the value of the amount of ore that was extracted multiplied with amount of unit sold. This will be:

= (434,880/2,718,000) × 2,310,000

= 0.16 × 2,310,000

= $369,600