Question

in proportion Mining Company acquired property with copper ore reserves estimated at 2 million pounds for $180 will have an estimated value of $100,000 after the ore has been extracted. Before any ore o Mining Company acqu Arizonia or $1,800,000 Before any ore could be e to incur $500,000 of developmental costs. In the first year, 200,000 pounds wee of ore were sold; in the second year, 400.00 pounds were removed and 410.000 pounds Cclatig aud In the course of the second year's production, discoveries were made that indicated that if is spent on added costs were that if an added 51,460 000 million pounds, After de ere incurred, production for the third year amounted to 510,000 pounds with sales of 40.00 pons. developmental costs during the third yeat, fuure removable ore will total 2.4 Required aculate depletion and cost of goods sold that the company reports on its income statement for each of the ears. Assume FIFO (first-in, first-out) inventory flow.

Answer 1

Total cost of the mine = Acquisition cost + Development Cost - Estimated Value = $1,800,000 + $500,000 - $100,000 = $2,200,000

Estimated Copper Ore reserves = 2 million Pounds, So the cost per pound is $2,200,000 / 2,000,000 = $1.10

Depletion cost will be calculated in the basis of ore removed while cost of goods sold will be on the basis of ore sold.

1st Year :

Depletion cost = 200,000 * $1.10 = $220,000

Cost of Goods Sold = 160,000 * $1.10 = $176,000

2nd Year

Depletion Cost = 400,000 * $1.10 = $440,000

Cost of Goods Sold = 410,000 * $1.10 = $451,000

At the end of second year closing stock is 30,000 pounds and its value is $33,000 (30,000 * $1.10)

3rd Year

In the third year, additional development cost incurred is $1,460,000 and the estimated ore that can be removed is 2.5 million pounds. So, the revised cost of mine at the start of 3rd year = original cost of mine - cost depleted during first two years + additional cost incurred in third year = $2,200,000 - $220,000 - $440,000 + $1,460,000 = $3,000,000.

Estimated ore that can be removed is 2.50 million pounds, so the cost per pound is $1.20.

Depletion cost for 3rd year = 510,000 * $1.20 = $612,000.

Total ore sold during the third year is 450,000 pounds.

Cost of goods sold :

Of 30,000 pounds that were unsold at the end of second year i.e. 30,000 * $1.10 = $33,000 + cost of 420,000 pounds i.e. 420,000 * $1.20 = $504,000; so the total cost of goods sold of 450,000 pounds is $33,000 + $504,000 = $537,000.