Question

Problem 2 On March 25, 2014 Goodnight, Inc. purchased land with iron ore deposits for $10 million. The estimated residual value of the land was $1 million. At the time of purchase a geological survey estimated 4.5 million tons of removable ore were under the ground. In 2014 250,000 tons of ore were mined. A new survey was made during 2015. That survey estimated 3 million tons of ore were available for mining. In 2015 300,000 tons of ore were mined. What was the amount of depletion expense for 2014 and 2015?

Answer 1

To calculate the depletion per unit you take the total cost less salvage value and divide it by the total number of estimated units.

The expense is calculated by multiplying the depletion per unit by the number of units consumed or sold during the current period.

2014

Depletion per unit = (total cost - salvage value) / estimated units

Depletion per unit = ($10m - $1m)/4.5m = $2 per ton

Depletion expense = depletion per unit * number of units consumed

Depletion expenses for 2014 = 2 * 250,000 = $500,000

2015

Since the estimate of ore has changed in 2015, the total cost is now reduced by depletion expense for 2014. Hence the total cost is now $10m - $0.5m = $9.5m

Depletion per unit = (total cost - salvage value) / estimated units

Depletion per unit = ($9.5m-$1m)/ 3m = $2.833 per ton

Depletion expense = depletion per unit * number of units consumed

Depletion expenses for 2015 = 2.833* 300,000 = $ 850,000.