Question

On January 1, Year 1, Gemstone Mining Company (GMC) paid $10,500,000 cash to purchase the rights to extract raw stone from a surface pit estimated to hold 50,000 pounds of useable material. GMC extracted 10,000 pounds of stone in Year 1, 20,000 pounds of stone in Year 2, and 25,000 pounds of stone in Year 3. The rights to the surface pit were expected to have a $500,000 salvage value at the end of Year 3.
Required:
1. Based on this information, the amount of depletion expense shown on the Year 3 income statement is _________.

Answer 1

Answer:

The amount of depletion  charge in year 3 income statement is $4,000,000

Explanation:

The depletion charge  would be based on volume of stone extracted on yearly basis.

The depletion charge=cost-salvage value/(total volume of stone)

The depletion charge=($10,500,000-$500,000)/50,000

The depletion charge=$200 per pound

In year one depletion charge =$200*10000 pounds

                                                      =$2,000,000

In year two, depletion charge=$200*20000 pounds

                                                      =$4,000,000

In year three, depletion charge=$200*25000 pounds

                                                        =$5,000,000

The year 3 depreciation charge is restricted to the balance of the depletion amount of $10 million

Balance of depletion amount=$10,000,000-$2000,000(year one)-$4000,0000(year two)

Balance of depletion amount=$4,000,0000