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Chapter 11: Q14Q (page 583)
Charlie Parker, president of Spinners Company, has recently noted that depreciation increases cash provided by operations and therefore depreciation is a good source of funds. Do you agree? Discuss.
Answer
No, depreciation does not provide cash; revenues do.
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Describe cost depletion and percentage depletion. Why is the percentage depletion method permitted?
(Depletion Computations鈥擬inerals) At the beginning of 2017, Aristotle Company acquired a mine for \(970,000. Of this amount, \)100,000 was ascribed to the land value and the remaining portion to the minerals in the mine. Surveys conducted by geologists have indicated that approximately 12,000,000 units of ore appear to be in the mine. Aristotle incurred \(170,000 of development costs associated with this mine prior to any extraction of minerals. It also determined that the fair value of its obligation to prepare the land for an alternative use when all of the mineral has been removed was \)40,000. During 2017, 2,500,000 units of ore were extracted and 2,100,000 of these units were sold.
Instructions
Compute the following.
Fernandez Corporation purchased a truck at the beginning of 2017 for \(50,000. The truck is estimated to have a salvage value of \)2,000 and a useful life of 160,000 miles. It was driven 23,000 miles in 2017 and 31,000 miles in 2018. Compute depreciation expense for 2017 and 2018.
(Depletion, Timber, and Unusual Loss) Conan O鈥橞rien Logging and Lumber Company owns 3,000 acres of timberland on the north side of Mount Leno, which was purchased in 2005 at a cost of \(550 per acre. In 2017, O鈥橞rien began selectively logging this timber tract. In May 2017, Mount Leno erupted, burying the timberland of O鈥橞rien under a foot of ash. All of the timber on the O鈥橞rien tract was downed. In addition, the logging roads, built at a cost of \)150,000, were destroyed, as well as the logging equipment, with a net book value of \(300,000.
At the time of the eruption, O鈥橞rien had logged 20% of the estimated 500,000 board feet of timber. Prior to the eruption, O鈥橞rien estimated the land to have a value of \)200 per acre after the timber was harvested. O鈥橞rien includes the logging roads in the depletion base.
O鈥橞rien estimates it will take 3 years to salvage the downed timber at a cost of \(700,000. The timber can be sold for pulp wood at an estimated price of \)3 per board foot. The value of the land is unknown, but must be considered nominal due to future uncertainties.
Instructions
Distinguish among depreciation, depletion, and amortization.
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