
(1)
Depletion: Depletion is the reduction in the value of natural resource which belongs to the company.
To compute: The depletion and depreciation of the mine, mining equipments and facilities of Company M for 2016 and 2017.
(1)

Explanation of Solution
Calculate the cost of the mineral mine
Cost of the mineral mine is purchase price plus development expenses. Use the following formula:
Therefore, cost of the mine is $2,200,000.
- a. Calculate depletion on mine for the years 2016 and 2017.
To compute a unit depletion rate, deduct the residual value of the asset from the asset value and divide it by the total number of units that expect to recover. The formula for the unit depletion rate is:
In 2016, Company M estimated that 400,000 tons of ore would be extracted and residual value would be $100,000. In the year 2017, the estimate of total tons of ore in the mine was revised from 400,000 tons to 487,000 tons. In 2016, 50,000 tons and during 2017, 80,000 tons of ore were extracted.
Depletion of mineral mine for 2016:
Depletion of mineral mine for 2017:
- b. Compute depreciation on mining equipments for the years 2016 and 2017:
In the given case, Company M uses the
Use the below formula to determine the amount of depreciation per ton.
Depreciation on mining equipments for 2016:
Depreciation on mining equipments for 2017:
- c. Compute depreciation on mining facilities for the years 2016 and 2017:
Company M built various structures and small storage buildings on the site at a cost of $150,000 having useful life of 10 years. No residual value is estimated.
Depreciation on mining facilities for 2016:
Depreciation on mining facilities for 2017:
Hence, Depletion of mineral mine for the year 2016, is $262,000, for the year 2017, revised depletion is $336,000. Depreciation on mining equipment for the year 2016, is $9,500, for the year 2017 revised depreciation is $12,160. Depreciation on the mining facilities for the year 2016, is $18,750, for the year 2017 revised depreciation is $24,000.
(2)
To compute: The book values of the mineral mine, facilities (structures) and equipments as of December 31, 2017.
(2)

Explanation of Solution
Compute the book value of the mineral mine.
Computation of the book value of the mineral mine is as follows:
Particulars |
Amount in $ |
Amount in $ |
Cost of the mineral mine | 2,200,000 | |
Less: Accumulated depletion: | ||
For the year 2016 | 262,500 | |
For the year 2017 | 336,000 | (598,500) |
Book value of the mineral mine | 1,601,500 |
Table (1)
Hence, book value of the mineral mine is $1,601,500 as of December 31, 2017.
Compute the book value of the mining facilities (structures):
Computation of the book value of the mining facilities (structures) is as follows
Particulars |
Amount in $ |
Amount in $ |
Cost of the mining facilities | 150,000 | |
Less: | ||
For the year 2018 | 18,750 | |
For the year 2019 | 24,000 | 42,750 |
Book value of the mining facilities | 107,250 |
Table (2)
Hence, book value of the mining facilities (structures) is $107 250, as of December 31, 2017.
Compute the book value of the mining equipments:
Computation of the book value of the mining equipments is as follows
Particulars |
Amount in $ |
Amount in $ |
Cost of the mining equipments | 80,000 | |
Less: Accumulated depreciation: | ||
For the year 2016 | 9,500 | |
For the year 2017 | 12,160 | 21,660 |
Book value of the mining equipment | 58,340 |
Table (3)
Hence, book value of the mining equipments is $58,340, as of December 31, 2017.
Accumulated depreciation is deducted from the cost of the asset because of reduction in the value of the asset due to usage and extracting the mineral ore.
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Chapter 20 Solutions
INTERMEDIATE ACCOUNTING
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