**Depletion Calculation: A Practical Application****Scenario:**A coal company has invested $20 million in a mine, which is estimated to contain 25 million tons of coal with no salvage value. The mine is anticipated to be operational for a period of 5 years. During the first year, 1,070,000 tons of coal are extracted and sold.**Question:**What is the depletion for the first year?**Options:**- $85,600- $856,000- $256,800- Cannot be determined from the information provided**Solution:**To calculate the depletion expense for the first year, the following steps should be taken:1. **Determine the depletion cost per ton:** \[ \text{Depletion Cost per Ton} = \frac{\text{Total Investment}}{\text{Total Estimated Tons}} \] \[ \text{Depletion Cost per Ton} = \frac{20,000,000}{25,000,000} = \$0.80 \text{ per ton} \]2. **Calculate the depletion expense for the first year:** \[ \text{Depletion Expense} = \text{Depletion Cost per Ton} \times \text{Tons Extracted in the First Year} \] \[ \text{Depletion Expense} = 0.80 \times 1,070,000 = \$856,000 \]Thus, the correct option is:- $856,000This exercise demonstrates how to apply the unit depletion rate to determine the annual depletion expense for resource extraction.

Depletion expense is the expense charged on the use of natural resources during the accounting year.…

A coal company invests $20 million in a mine estimated to have 25 million tons of coal and no salvage value. It is expected that the mine will be in operation for 5 years. In the first year, 1070000 tons of coal are extracted and sold. What is the depletion for the first year? O $85600 $856000 O $256800 O Cannot be determined from the information provided

A coal company invests $20 million in a mine estimated to have 25 million tons of coal and no salvage value. It is expected that the mine will be in operation for 5 years. In the first year, 1070000 tons of coal are extracted and sold. What is the depletion for the first year? O $85600 $856000 O $256800 O Cannot be determined from the information provided

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

**Depletion Calculation: A Practical Application**

**Scenario:**
A coal company has invested $20 million in a mine, which is estimated to contain 25 million tons of coal with no salvage value. The mine is anticipated to be operational for a period of 5 years. During the first year, 1,070,000 tons of coal are extracted and sold.

**Question:**
What is the depletion for the first year?

**Options:**
- $85,600
- $856,000
- $256,800
- Cannot be determined from the information provided

**Solution:**

To calculate the depletion expense for the first year, the following steps should be taken:

1. **Determine the depletion cost per ton:**
\[
\text{Depletion Cost per Ton} = \frac{\text{Total Investment}}{\text{Total Estimated Tons}}
\]
\[
\text{Depletion Cost per Ton} = \frac{20,000,000}{25,000,000} = \$0.80 \text{ per ton}
\]

2. **Calculate the depletion expense for the first year:**
\[
\text{Depletion Expense} = \text{Depletion Cost per Ton} \times \text{Tons Extracted in the First Year}
\]
\[
\text{Depletion Expense} = 0.80 \times 1,070,000 = \$856,000
\]

Thus, the correct option is:
- $856,000

This exercise demonstrates how to apply the unit depletion rate to determine the annual depletion expense for resource extraction.

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