Question

During 2019, a company purchased a mine at a cost of $4,324,000. The company spent an additional $760,000 getting the mine ready for its intended use. It is estimated that 460,000 tons of mineral can be removed from the mine and the residual value of the mine will be $760,000. During 2019, 61,000 tons of mineral were removed from the mine and 51,000 tons were sold.
Which of the following statements is incorrect with respect to the accounting for the mine?
a. The book value of the mine on December 31, 2014 was $3,750,600.
b. The inventory of minerals was $94,000 at December 31, 2014.
c. The 2014 cost of goods sold was $479,400.
d. The book value of the mine decreased $573,400 during 2014.

Answer 1

Answer: d. The book value of the mine decreased $573,400 during 2014.

Explanation:

Book value of the mine is:

= Cost + Amount spent to make mine ready

= 4,324,000 + 760,000

= $5,084,000

The depreciation for this mine will be done based on the amount of minerals removed per year from the estimated total. It will be based on the depreciable value which is the book value net of the residual value.

In year 2014, depreciation is:

= Proportion removed * (Book value - Residual value)

= 61,000 / 460,000 * (5,084,000 - 760,000)

= $573,400