Question

Coal Miner Co. acquired coal rights for $100,000,000. It is estimated that there are 2,500,000 tons of the resource, and during the current year 500,000 tons were mined and sold. What is the amount of depletion for the current year?
a. $2,500,000
b. $10,000,000
c. $20,000,000
d. $2,000,000

Answer 1

Answer:

C

Explanation:

To estimate the amount of depletion for the current year?

We need to know the rate of depletion which

$100,000,000/2,500,000 = $40/ton

The amount of depletion for the current year will be

$40/ton x 500,000 tons = $20,000,000

Answer 2

Answer:

Correct answer is C, $20,000,000

Explanation:

Computation of depletion expense of natural resources has similar concept with depreciation of fixed asset. To calculate the depletion expense, we have to deduct first the salvage value (if there is) from the cost of an asset divided by the total estimated units available multiplied by the units extracted.

FORMULA:

(TOTAL COST - SAVAGE VALUE) / TOTAL ESTIMATED UNITS AVAILABLE x UNITS EXTRACTED

($100,000,000 - 0 ) / 2,500,000 x 500,000 = $20,000,000