Josephine Company acquired a tract of land containing an extractable natural resource. The entity is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological survey indicated that the recoverable reserves would be 2,000,000 tons and that the extraction will be completed in five years. Relevant cost of information follows: Land 9,000,000 Exploration and development costs 1,000,000 Expected cash flow for restoration costs 1,500,000 Credit- adjusted risk-free interest rate 10% PV of 1 at 10% for 5 periods 0.62 What is the depletion charge per ton of extracted material?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Josephine Company acquired a tract of land containing an extractable natural resource. The entity is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource.
Geological survey indicated that the recoverable reserves would be 2,000,000 tons and that the extraction will be completed in five years.
Relevant cost of information follows:
Land 9,000,000
Exploration and development costs 1,000,000
Expected
Credit- adjusted risk-free interest rate 10%
PV of 1 at 10% for 5 periods 0.62
What is the depletion charge per ton of extracted material?
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