   Chapter 18, Problem 6CE

Chapter
Section
Textbook Problem

Popilarz Mining acquired a coal mine at a cost of $4,000,000 with the expectation that 1,250,000 tons of coal would be mined over its lifetime. The estimated salvage value of the land is$250,000, and 100,000 tons of coal are mined in the first year. Compute the depletion expense for the first year.

To determine

Ascertain the depletion expense for first year.

Explanation

Depletion: Depletion is a process of allocation of the cost of natural resources like oil reserves, mineral deposits, and timber tracts, based on the capacity or output extracted or harvested.

Compute depletion expense for first year.

Step 1: Compute depletion rate, if cost of coal mine is $4,000,000, salvage value is$250,000 and estimated number of tons to be extracted are 1,250,000 tons.

Depletion rate = Cost of coal mine–Salvage value Number of tons to be extracted=$4,000,000–$250,0001,250,000 tons=\$3 depletion rat

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