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Contemporary Mathematics for Busin...

8th Edition
Robert Brechner + 1 other
ISBN: 9781305585447

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BuyFindarrow_forward

Contemporary Mathematics for Busin...

8th Edition
Robert Brechner + 1 other
ISBN: 9781305585447
Textbook Problem

The Canmore Mining Company paid $5.330.000 for a parcel of land, including the mining rights. In addition, the company spent $900,000 on labor and equipment to prepare the site for mining operations. After mining is completed, it is estimated that the land and equipment will have a residual value of $400,000. Geologists estimated that the mine contains 185.000 tons of coal. If Canmore mined 15.000 tons of coal in the first year, what is the amount of the depletion cost?

To determine

To calculate: The amount of depletion cost of natural resource when the Canmore Mining Company paid $5,330,000 for a parcel of land in addition with mining rights.

Explanation

Given Information:

The Canmore Mining Company paid $5,330,000 for a parcel of land in addition with mining rights and to prepare the site for mining operations, the company spent $900,000 on labor and equipment. The residual value is $400,000 when the mining is completed. The mine contains 185,000 tons of coal and Canmore mined 15,000 tons of coal in the first year.

Formula used:

The steps to calculate the depletion cost of natural resources are as follows:

Step 1: Calculate the average depletion cost per unit by the following formula.

Average depletion cost per unit=Total cost of resourceResidual valueEstimated total units available

Step 2: Calculate the periodic depletion cost by multiplying units produced in current period and average depletion cost per unit as:

Periodic depletion cost=Units produced in current period×Average depletion cost per unit

Calculation:

Consider the Canmore Mining Company paid $5,330,000 for a parcel of land in addition with mining rights and to prepare the site for mining operations, the company spent $900,000 on labor and equipment.

The total cost of resource is:

Total cost=5,330,000+900,000=$6,230,000

Now, consider the provided residual value is $400,000 when the mining is completed and the mine contains 185,000 tons of coal

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