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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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At the beginning of Year 1, Ithaca Incorporated purchased land for $1,500,000 from which it expects to extract 800,000 tons of minerals. The estimated residual value is $250,000. What is Ithaca’s unit depletion rate? Assume Ithaca extracted 25,000 tons in Year 1. What is Ithaca’s depletion for Year 1 (round to the nearest dollar)?

To determine

Calculate the depletion rate per unit and the value of depletion of Company I for year 1.

Explanation

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 depletion rate per unit and the value of depletion of Company I for year 1 as follows:

Depletion rate per unit:

Depletion rate = [Cost Residual value ]Estimated capacity<

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