Depletion

CHAPTER 18

Problem 18-1 Problem 18-2

1. D 1. B2. A 2. C3. A 3. C4. C 4. C5. A 5. D

Problem 18-3

1. Ore property5,000,000

Cash 5,000,000

2. Ore property

3,000,000 Cash

3,000,000

3. Machinery4,000,000

Cash 4,000,000

4. Depletion1,140,000

Accumulated depreciation 1,140,000

8,000,000 – 400,000 = 7,600,0007,600,000 / 2,000,000 = 3.80300,000 x 3.80 = 1,140,000

5. Depreciation 600,000

Accumulated depreciation 600,000

4,000,000 / 2,000,000 = 2.00300,000 x 2.00 = 600,000

Problem 18-4

2008 Rock and gravel property 960,000Cash

960,000

Depletion (1,000,000 x .40) 400,000

Accumulated depletion 400,000

2009 Rock and gravel property

490,000Cash

490,000

Depletion (600,000 x .75) 450,000Accumulated depletion

450,000

Total cost (960,000 + 490,000) 1,450,000

Less: Accumulated depletion 400,000

Depletable cost 1,050,000

Divide by estimated remaining output (2,400,000 – 1,000,000) 1,400,000

Revised depletion rate per ton .75

2010 Rock and gravel property 500,000Cash

500,000

Depletion (700,000 x .44) 308,000Accumulated depletion

308,000

Total cost 1,450,000

Add: Additional development cost 500,000 Total

1,950,000Less: Accumulated depletion (400,000 + 450,000)

850,000 Remaining depletable cost

1,100,000Divide by new estimated remaining output

2,500,000New depletion rate

.44

Problem 18-5

2008 Resource property 3,960,000

Cash 3,960,000

Building960,000

Equipment 1,240,000Cash

2,200,000

Depletion (12,000 x 32)

384,000Accumulated depletion

384,000

Cost of resource property 3,960,000 Less:

Residual value 120,000 Depletable cost

3,840,000

Divide by estimated output 120,000 Depletion rate per

unit 32

Depreciation (12,000 x 8) 96,000Accumulated depreciation – building

96,000

960,000Depreciation rate per unit = ---------------- = 8

120,000

The output method is used in computing the depreciation of the building because the life of the resource property (5 years or 120,000 / 24,000) is

shorter than the life of the building (8 years).

Depreciation310,000

Accumulated depreciation310,000

(1,240,000 / 4 years = 310,000)

The straight line method is used for the heavy equipment because the life of 4 years is shorter than the life of the resource property of 5 years.

2009 Depletion800,000

Accumulated depletion (25,000 x 32)800,000

Depreciation (25,000 x 8)200,000Accumulated depreciation – building

200,000

Depreciation310,000

Accumulated depreciation – equipment310,000

Problem 18-6

2008 Ore property 5,400,000Cash

5,400,000

Ore property450,000

Estimated liability for restoration cost450,000

Mine improvements 8,000,000Cash

8,000,000

2009 Depletion (600,000 x 2.60) 1,560,000

Accumulated depletion 1,560,000

Depreciation (600,000 x 4) 2,400,000


2010 Depletion (400,000 x 1.60)640,000Accumulated depletion

640,000


Less: 2009 depletion 1,560,000

Balance (3,640,000 / 2,275,000 = 1.60) 3,640,000

Mine improvements770,000

Cash770,000

Depreciation (400,000 x 2.80) 1,120,000


Cost (8,000,000 + 770,000) 8,770,000

Less: Accumulated depreciation 2,400,000

Book value (6,370,000 / 2,275,000 = 2.80) 6,370,000

Problem 18-7

Depletion rate (5,000,000 / 1,000,000) 5.00

Depreciation rate (8,000,000 / 1,000,000) 8.00

First yearDepletion (200,000 x 5)

1,000,000Depreciation (200,000 x 8)

1,600,000

Second yearDepletion (250,000 x 5)

1,250,000Depreciation (250,000 x 8)

2,000,000

Third yearDepletion

noneDepreciation (Schedule A)

550,000

Schedule A – Computation of depreciation for third year

Cost of equipment 8,000,000 Less: Accumulated depreciation

3,600,000 Book value – beginning of third year 4,400,000 Divide by remaining useful life in years (10 – 2) 8 Depreciation for third year

550,000

Fourth year

Depletion (100,000 x 5)500,000

Depreciation (Schedule B)700,000

Schedule B – Computation of depreciation for fourth year

Cost of equipment 8,000,000

Less: Accumulated depreciation 4,150,000

Book value – beginning of fourth year 3,850,000

Original estimate of resource deposits 1,000,000 tons

Less: Extracted in first and second years 450,000 Remaining output

550,000 tons

Depreciation rate per unit (3,850,000 / 550,000) 7.00

Depreciation for third year (100,000 x 7) 700,000

Problem 18-8

1. Retained earnings 1,500,000

Accumulated depletion 2,500,000

Total 4,000,000

Less: Capital liquidated 1,800,000

Depletion in ending inventory (5,000 x 20) 100,000 1,900,000

Maximum dividend 2,100,000

2. Retained earnings 1,800,000

Capital liquidated 200,000Dividends payable

2,000,000

Problem 18-9

1. Cash (50,000 x 110) 5,500,000Share capital (50,000 x 100)

5,000,000Share premium

500,000

2. Resource property 3,000,000Cash

3,000,000

3. Mining equipment 800,000Cash

800,000

4. Cash (85,000 x 50) 4,250,000

Sales4,250,000

5. Mining and other direct cost 2,268,000

Administrative expenses 500,000Cash

2,768,000

6. Depletion 270,000

Accumulated depletion (3,000,000 / 1,000,000 x 90,000) 270,000

7. Depreciation (90,000 x .80) 72,000Accumulated depreciation - mining equipment

72,000

Depreciation rate (800,000 / 1,000,000) = .80

8. Inventory, December 31 (5,000 x 29) 145,000

Profit and loss 145,000

Mining labor and other direct costs 2,268,000

Depletion 270,000

Depreciation 72,000

Total production costs incurred 2,610,000

Divide by number of units extracted 90,000

Unit cost 29

Multinational CompanyIncome Statement

Year ended December 31, 2008

Sales4,250,000

Cost of salesMining labor and other direct costs

2,268,000Depletion

270,000Depreciation

72,000Total production cost 2,610,000Less: Inventory, December 31 145,000 2,465,000

Gross income 1,785,000

Administrative expenses 500,000

Net income 1,285,000

Multinational CompanyStatement of Financial Position

December 31, 2008

AssetsCurrent assets:

Cash3,182,000

Inventory 145,000 3,327,000

Noncurrent assets:Resource property3,000,000Less: Accumulated depletion

270,000 2,730,000Mining equipment

800,000Less: Accumulated depreciation

72,000 728,000 3,458,000Total assets

6,785,000

EquityShare capital

5,000,000Share premium

500,000Retained earnings

1,285,000Total equity

6,785,000

Retained earnings1,285,000

Add: Accumulated depletion 270,000

Total 1,555,000

Less: Unrealized depletion in ending inventory (5,000 x 3) 15,000

Maximum dividend 1,540,000

Retained earnings 1,285,000

Capital liquidated 255,000Dividends payable

1,540,000

Problem 18-10

1. Purchase price 50,000

Road construction5,000,000

Improvements and development costs 750,000

Total cost5,800,000

Residual value ( 600,000)

Depletable cost5,200,000

Depletion rate per unit (5,200,000 / 4,000,000) 1.30

Depletion for 2008 (500,000 x 1.30) 650,000


Depletion in 2008 ( 650,000)

Remaining depletable cost4,550,000

Development costs in 20091,300,000

Total depletable cost – 1/1/20095,850,000

Original estimated tons

4,000,000 Additional estimate

3,000,000 Total estimated tons

7,000,000 Extracted in 2008

( 500,000) Remaining tons – 1/1/2009

6,500,000

New depletion rate per unit (5,850,000 / 6,500,000) .90

Depletion for 2009 (1,000,000 x .90) 900,000

2. Cost of buildings2,000,000

Residual value ( 200,000)

Depreciable cost1,800,000

Depreciation rate per unit (1,800,000 / 4,000,000) .45

Depreciation for 2008 (500,000 x .45) 225,000

In the absence of any statement to the contrary, the output method is used in computing depreciation of mining equipment.

Depreciable cost1,800,000

Depreciation for 2008 ( 225,000)

Remaining depreciable cost1,575,000

Additional building in 2009 375,000

Total depreciable cost – 1/1/20091,950,000

New depreciation rate per unit (1,950,000 / 6,500,000) .30

Depreciation for 2009 (1,000,000 x .30) 300,000

Problem 18-11

2008 No depletion because there is no production.

2009 Purchase price28,000,000

Estimated restoration cost 2,000,000

Development cost – 2008 1,000,000

Development cost – 2009 1,000,000

Total cost32,000,000

Residual value ( 5,000,000)


Rate in 2009 (27,000,000 / 10,000,000) 2.70

Depletion in 2009 (3,000,000 x 2.70) 8,100,000

2010 Tons extracted in 2010 3,500,000

Tons remaining in 12/31/2010 2,500,000

Total estimated output – 1/1/2010 6,000,000

New rate in 2010 (27,000,000 – 8,100,000/6,000,000) 3.15

Depletion in 2010 (3,500,000 x 3.15)11,025,000

Problem 18-12 Answer B

Acquisition cost 26,400,000

Development cost 3,600,000

Estimated restoration cost 1,800,000


Less: Residual value 3,000,000


Rate per unit (28,800,000 / 1,200,000) 24

Depletion for 2008 (60,000 x 24) 1,440,000

Problem 18-13 Answer C

Depletion rate per unit (9,200,000 / 4,000,000) 2.30


Rate per unit (46,800,000 – 3,600,000 / 2,160,000)20

Depletion in cost of goods sold (240,000 x 20) 4,800,000

Problem 18-15 Answer D

Acquisition cost 10,000,000



Less: Accumulated depletion – 12/31/2007(7,000,000 / 10,000,000 = .70 x 4,000,000)

2,800,000Remaining depletable cost – 1/1/2008

4,200,000

New depletion rate (4,200,000 / 7,500,000) .56

Depletion for 2008 (1,500,000 x .56) 840,000

Problem 18-16 Answer B

Depletable cost

33,000,000Depletion for 2007 (33,000,000 / 4,000,000 = 8.25 x 200,000)

( 1,650,000)Balance – 1/1/2008

31,350,000

Production in 2008 225,000

New estimate – 12/31/2008 5,000,000

New estimate – 1/1/2008 5,225,000

Depletion for 2008 (31,350,000 / 5,225,000 = 6 x 225,000) 1,350,000

Problem 18-17

Question 1 – Answer A

Purchase price14,000,000



Depletion rate (12,000,000 / 1,500,000) 8.00

Depletion for 2008 (150,000 x 8) 1,200,000

Production (25,000 x 6) 150,000

Question 2 – Answer C

Production from July 1 to December 31, 2008 (25,000 x 6) 150,000 tons

Annual production (25,000 x 12) 300,000 tons

Estimated life of mine (1,500,000 / 300,000) 5 years

Since the life of the mine is shorter than the life of the equipment, the output method is used in computing depreciation.

Equipment 8,000,000

Less: Residual value 500,000

Depreciable cost 7,500,000

Rate per unit (7,500,000 / 1,500,000) 5.00

Depreciation for 2008 (150,000 x 5) 750,000


Purchase price 9,000,000

Development costs in 2007 300,000


Residual value 1,200,000


Rate in 2007 (8,100,000 / 2,000,000) 4.05

Depletion for 2007 (200,000 x 4.05) 810,000


Depletion in 2007( 810,000)

Balance 7,290,000

Development costs in 2008 135,000

Depletable cost in 2008 7,425,000

Rate in 2008 (7,425,000 / 1,650,000) 4.50

Depletion for 2008 (300,000 x 4.50) 1,350,000

Depletion

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