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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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Lofton Company acquired land containing coal. Lorton will restore the land to a condition suitable for recreational use after it has extracted the coal. Geological surveys estimate that the recoverable reserves will be 4,000,000 tons and that the land will have a value of $1 million after restoration. Relevant cost information follows :

Chapter 11, Problem 19E, Lofton Company acquired land containing coal. Lorton will restore the land to a condition suitable

Required:

If Lorton maintains no inventories of coal, what is the depletion rate per ton of coal?

To determine

Calculate the depletion rate of per ton of coal for Company L.

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 of per ton of coal for Company L as follows:

Depleption rate = [(Cost of land + Estimated fair value of retirement�

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