Concept explainers
1.
Calculate the total expenses that are included in the income statement of company A for 2016.
1.
Explanation of Solution
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.
Calculate the amount of total expenses that would be included in the income statement of company A for 2016 as follows:
Working note (1):
Calculate the depletion rate per ton.
Working note (2):
Calculate the depreciation rate per ton.
Working note (3):
Calculate the value of accretion.
Working note (4):
Calculate number of tons sold.
Working note (5):
Calculate the total expense of coal per ton.
Therefore, the total expense of Company A for 2016 is $606,300.
2.
Calculate the cost of inventory of Company A for the year ended December 31, 2016.
2.
Explanation of Solution
Calculate the cost of inventory of Company A for the year ended December 31, 2016 as follows:
Working note (6):
Calculate the total tons of coal produced during the year.
3.
Calculate the total expense of Company A for 2017, and assume the new estimation of the company indicates that the capacity of the mine is 500,000 tons.
3.
Explanation of Solution
Calculate the amount of total expense of Company A for 2017, and assume the new estimation of the company indicates that the capacity of the mine is 500,000 tons as follows:
Working note (7):
Calculate the new depletion rate per ton.
Note: The depletion expense for sold item is $165,000
Working note (8):
Calculate the depreciation rate per ton.
Note: The depreciation expense for sold item is $12,000
Working note (9):
Calculate the present value of mine for 2017.
Note: Assume the present value of mine is increased by 10%.
Working note (10):
Calculate the value of accretion for 2017.
Working note (11):
Calculate the total expense of coal per ton.
Working note (12):
Calculate number of tons sold.
Therefore, the total expense of Company A for 2017 is $1,508,424.
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Chapter 11 Solutions
Intermediate Accounting: Reporting and Analysis
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