Question

A coal company invests $15 million in a mine estimated to have 20 million tons of coal and no salvage value. It is expected that the mine will be in operation for 5 years. In the first year, 1000000 tons of coal are extracted and sold. What is the depletion expense for the first year?a. $750,000b. $300,000c. $75,000d. Cannot be determined from the information provided.

Answer 1

Answer:

a. $750,000

Explanation:

We can compute the depletion expense by dividing investment by total available capacity of the coal mine. We charge the full investment as there is no salvage value.

Depletion expense = 15 / 20 = $0.75 million per million tons.

Total extracted coal = 1,000,000

so depletion expense for the first year = 1,000,000 * 0.75 = $750,000

We calculated depletion as we would any depreciation and charge it on activity basis which is the amount of coal extracted.

Hope that helps.