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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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On July 1, 2019, Amplex Company purchased a coal mine for $2 million. The estimated capacity of the mine was 800,000 tons. During 2019, Amplex mines 10,000 tons of coal per month and sells 9,000 tons per month. The selling price is $30 per ton and production costs (excluding depletion and depreciation) are $8 per ton. At the end of the mine’s life, Amplex estimates that the present value of the cost to restore the land is $300,000, after which it can be sold for $100,000. Amplex also purchased some temporary housing for the miners at a cost of $170,000. The housing has an expected life of 10 years but is expected to be sold for $10,000 at the end of the mine’s life. The housing is depreciated using the activity method. Amplex uses the FIFO cost flow assumption and its discount rate is 10%.

Required:

  1. 1. Compute the company’s expenses included on the 2019 income statement.
  2. 2. Compute the cost of the company’s inventory at December 31, 2019.
  3. 3. In January 2020, a new estimate indicated that the capacity of the mine was only 500,000 tons at that time. Compute the company’s expenses included on the 2020 income statement if the company mines and sells 10,000 tons per month. Round the depletion rate to 3 decimal places.

1.

To determine

Calculate the total expenses that are included in the income statement of company A for 2019.

Explanation

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

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 2019as follows:

Total expense =( Total expense of coal per ton ×Number of tons sold)+Accretion=($10.95 per tons (5) ×54,000 tons (4) )+$15,000 (3) =$606,300

Working note (1):

Calculate the depletion rate per ton.

Depleption rate = [(CostResidual value) +Present value]Estimated capacity of coal=($2,000,000$100,000)+$300,000800,000 tons=$2.75 per ton

Working note (2):

Calculate the depreciation rate per ton.

Depreciation rate = CostResidual valueEstimated capacity of coal=($170,000$10,000)800,000 tons=$0

2.

To determine

Calculate the cost of inventory of Company A for the year ended December 31, 2019.

3.

To determine

Calculate the total expense of Company A for 2020, and assume the new estimation of the company indicates that the capacity of the mine is 500,000 tons.

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