Question

Ayayai Mining Company purchased land on February 1, 2020, at a cost of $1,038,200. It estimated that a total of 57,900 tons of mineral was available for mining. After it has removed all the natural resources, the company will be required to restore the property to its previous state because of strict environmental protection laws. It estimates the fair value of this restoration obligation at $111,600. It believes it will be able to sell the property afterwards for $124,000. It incurred developmental costs of $248,000 before it was able to do any mining. In 2020, resources removed totaled 28,950 tons. The company sold 21,230 tons. Compute the following information for 2020. (a) Per unit mineral cost " (b) Total material cost of December 31, 2020, inventory " (c) Total material cost in cost of goods sold at December 31, 2020 $

Answer 1

In depletion computations, the total cost of mineral is computed at beginning. However, they are not directly assigned to inventory at beginning. They are assigned on proportionate basis on the basis of minerals extracted which is done below:

Computation of total material cost

Particulars	Amount ($)
Purchase cost	1,038,200
Restoration cost	111,600
Development cost	248,000
Less: Sales value	(124,000)
Total material cost	1,273,800

57,900 tons are mined

Hence, per unit mineral cost = 1,273,800/57,900 = $ 22 per tonne

2. Minerals in inventory = Tonnes sold – purchased = 28,950-21,230 = 7720

Hence, cost of inventory = 7720*22 = $ 169,840

3. Total material cost of goods sold at Dec 31,2020 = 22*21,230 = $ 467,060

Note that in cost of goods sold, the material cost of units sold is only considered.

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