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Chapter 11: Q23E (page 589)

(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.

  1. The total amount of depletion for 2017.
  2. The amount that is charged as an expense for 2017 for the cost of the minerals sold during 2017.

Short Answer

Expert verified

Answer

  1. Depletion = $225,000
  2. Expenses = $189,000

Step by step solution

01

Meaning of Depletion 

Theloss of natural resources as a result of access to them on a regular basis is called depletion.Hence, a company uses it when any kind of registered asset is involved, such as oil, coal, or gravel deposits.

02

(a) Calculating the amount of depletion for 2017

Calculating depletion per unit

Depletionperunit=Costmineacquired-Landvalue+Developmentcost+FairvalueobligationExpectedunits=$970,000-$100,000+$170,000+$40,00012,000,000=$1,080,00012,000,000=$0.09


Calculating the amount of depletion

Depletion=Numberofunitsextracted脳Depletioncostperunit=2,500,000脳$0.09=$225,000


03

(b) Calculating the amount that is charged as an expense for 2017 for the cost of the minerals sold during 2017

Expenses=Number鈥�ofunitssold脳Depletioncostperunit=2,100,000脳$0.09=$189,000

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Most popular questions from this chapter

(Depreciation Computations鈥擣our Methods) Robert Parish Corporation purchased a new machine for its assembly process on August 1, 2017. The cost of this machine was \(117,900. The company estimated that the machine would have a salvage value of \)12,900 at the end of its service life. Its life is estimated at 5 years, and its working hours are estimated at 21,000 hours. Year-end is December 31.

Instructions

Compute the depreciation expense under the following methods. Each of the following should be considered unrelated.

  1. Straight-line depreciation for 2017.
  2. Activity method for 2017, assuming that machine usage was 800 hours.
  3. Sum-of-the-years鈥�-digits for 2018.
  4. Double-declining balance for 2018.

Falcetto Company acquired equipment on January 1, 2016, for \(12,000. Falcetto elects to value this class of equipment using revaluation accounting. This equipment is being depreciated on a straight-line basis over its 6-year useful life. There is no residual value at the end of the 6-year period. The appraised value of the equipment approximates the carrying amount at December 31, 2016 and 2018. On December 31, 2017, the fair value of the equipment is determined to be \)7,000.

Instructions

  1. Prepare the journal entries for 2016 related to the equipment.
  2. Prepare the journal entries for 2017 related to the equipment.

Determine the amount of depreciation expense that Falcetto will record on the equipment in 2018.

(Depreciation鈥擱eplacement, Change in Estimate) Greg Maddox Company constructed a building at a cost of \(2,200,000 and occupied it beginning in January 1998. It was estimated at that time that its life would be 40 years, with no salvage value.

In January 2018, a new roof was installed at a cost of \)300,000, and it was estimated then that the building would have a useful life of 25 years from that date. The cost of the old roof was $160,000.

Instructions

  1. What amount of depreciation should have been charged annually from the years 1998 to 2017? (Assume straight-line depreciation.)
  2. What entry should be made in 2018 to record the replacement of the roof?
  3. Prepare the entry in January 2018 to record the revision in the estimated life of the building if necessary.
  4. What amount of depreciation should be charged for the year 2018?


(Impairment) Assume the same information as E11-16, except that Suarez intends to dispose of the equipment in the coming year. It is expected that the cost of disposal will be \(20,000.

Cost

\)9,000,000

Accumulated depreciation to date

1,000,000

Expected future net cash flows

7,000,000

Fair value

4,800,000

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
  2. Prepare the journal entry (if any) to record depreciation expense for 2018.
  3. The asset was not sold by December 31, 2018. The fair value of the equipment on that date is \(5,300,000. Prepare the journal entry (if any) necessary to record this increase in fair value. It is expected that the cost of disposal is still \)20,000.

(Depletion Computations鈥擳imber) Stanislaw Timber Company owns 9,000 acres of timberland purchased in 2006 at a cost of \(1,400 per acre. At the time of purchase, the land without the timber was valued at \)400 per acre. In 2007, Stanislaw built fire lanes and roads, with a life of 30 years, at a cost of \(84,000. Every year, Stanislaw sprays to prevent disease at a cost of \)3,000 per year and spends \(7,000 to maintain the fire lanes and roads. During 2008, Stanislaw selectively logged and sold 700,000 board feet of timber of the estimated 3,500,000 board feet. In 2009, Stanislaw planted new seedlings to replace the trees cut at a cost of \)100,000.

Instructions

  1. Determine the depreciation expense and the cost of timber sold related to depletion for 2008.
  2. Stanislaw has not logged since 2008. If Stanislaw logged and sold 900,000 board feet of timber in 2019, when the timber cruise (appraiser) estimated 5,000,000 board feet, determine the cost of timber sold related to depletion for 2019.
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