On July 1, 2017, DOTA Company purchased the rights to a mine. The total purchase price was $7,920,000 of which $240,000 was allocated to land. Estimated reserves were 1,600,000 tons. Jungkook expects to extract and sell 25,000 tons per month. Jungkook purchased new equipment on July 1, 2017. The equipment cost $3,960,000 and have a useful life of 8 years. However, after all the resources are removed, the equipment will be of no use and will be sold for $120,000. If sales and production conformed to expectations, what amount of depletion should the company recognize in 2017?
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.
On July 1, 2017, DOTA Company purchased the rights to a mine. The total purchase price was $7,920,000 of which $240,000 was allocated to land. Estimated reserves were 1,600,000 tons. Jungkook expects to extract and sell 25,000 tons per month. Jungkook purchased new equipment on July 1, 2017. The equipment cost $3,960,000 and have a useful life of 8 years. However, after all the resources are removed, the equipment will be of no use and will be sold for $120,000.
If sales and production conformed to expectations, what amount of depletion should the company recognize in 2017?
Step by step
Solved in 2 steps
