On January 2, 2019, Whistler Company purchased land for $450,000, from which it is estimated that 400,000 tons of ore could be extracted. It estimates that the present value of the cost necessary to restore the land is $80,000, after which it could be sold for $30,000.
During 2019, Whistler mined 80,000 tons and sold 50,000 tons. During 2020, Whistler mined 100,000 tons and sold 120,000 tons. At the beginning of 2021, Whistler spent an additional $100,000, which increased the reserves by 60,000 tons. In 2021, Whistler mined 140,000 tons and sold 130,000 tons. Whistler uses a FIFO cost flow assumption.
Required:
1.
Compute the amount of depletion involved in the income statement and ending inventory of Company W for 2019, 2020 and 2021.
Compute the amount of depletion involved in the income statement and ending inventory of Company W for 2019, 2020 and 2021.
Depletion:
Depletion is a process in which the cost of natural resources like oil reserves, mineral deposits, and timber tracts, is allocated equally over the extraction or harvesting period of the asset. When a resource is depleted, the value of resource is decreased and the value of extracted inventory obtained is increased. So, depletion is recorded on the balance sheet, and not on the income statement. But the Cost of Goods Sold expense is recorded when the extracted inventory is sold.
Compute the amount of depletion involved in the income statement and the ending inventory of Company W for 2019 as follows:
From income statement:
From ending inventory:
Compute the amount of depletion involved in the income statement and ending inventory of Company W for 2020 as follows:
From income statement:
From ending inventory:
Compute the amount of depletion involved in the income statement and ending inventory of Company W for 2021 as follows:
From income statement:
From ending inventory:
2.
Prepare the natural resources section of the balance sheet of Company W on December 31, 2019, 2020 and 2021.
3.
Ascertain the balance in the asset retirement obligation for the year 2019, 2020 and 2021.
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