Question

In 2016, Montana Mining Inc. purchased property with natural resources for $12,000,000. The property was relatively close to a large city and had an expected residual value of $2,000,000. However, Montana should restore the land after the exhaustion of natural resources. The present value of the asset retirement obligation was $880,000. Montana’s usual borrowing cost is 8%.

The following information relates to the use of the property:

A. In 2016, Montana spent $800,000 in development costs and $600,000 in buildings on the property. Montana does not anticipate that the buildings will have any utility after the natural resources are depleted.

B. In 2017 and 2018, $600,000 and $1,600,000, respectively, were spent for additional development on the mine.

C.The tonnage mined and estimated remaining tons for years 2016 to 2020 are as follows:

Year	Tons Extracted	Estimated Tons Remaining
2016	0	5,000,000
2017	1,500,000	3,500,000
2018	1,800,000	2,000,000
2019	1,700,000	900,000
2020	900,000	0

Based on the preceding information, calculate the depletion and depreciation each year from 2017 to 2020.

Answer 1

Particular		Year
	2016	2017	2018	2019	2020
Opening Balance		$                         -	$ 1,13,12,000.00	$     90,87,225.81	$ 73,15,096.77	$ 35,78,064.52
Acquision Cost of Property		$ 1,20,00,000.00
Development Cost		$       8,00,000.00	$       6,00,000.00	$     16,00,000.00
Buiding Acqusion Cost		$       6,00,000.00
Less : Residual Value		$     20,00,000.00
		$ 1,14,00,000.00	$ 1,19,12,000.00
Less : Saving In Borrowing Cost
( As retirement of Asset is being Deffered)
= 8,80,000$ * 8%		$          88,000.00	$          88,000.00	$          88,000.00	$       88,000.00	$       88,000.00
Total Depreciable Asset		$ 1,13,12,000.00	$ 1,18,24,000.00	$ 1,05,99,225.81	$ 72,27,096.77	$ 34,90,064.52
Less : Depreciation for the Year		$                         -	$     27,36,774.19	$     32,84,129.03	$ 36,49,032.26	$ 16,42,064.52
Less : Depreciation On Development Cost $16,00,000 incurred in 2018				$       6,12,765.96	$    6,80,851.06	$    3,06,382.98
Closing Depreciable Value		$ 1,13,12,000.00	$     90,87,225.81	$     73,15,096.77	$ 35,78,064.52	$ 18,48,000.00
Calculation of Depreciation In the Ratio of Tons Extraxted
		2017	2018	2019	2020	Total
Tons Extracted		15,00,000.00	18,00,000.00	20,00,000.00	9,00,000.00	62,00,000.00
Ratio		24.19	29.03	32.26	14.52	100.00
Depreciation on $1,13,12,000.00		27,36,774.19	32,84,129.03	36,49,032.26	16,42,064.52	1,13,12,000.00
In the Year 2018			2018	2019	2020	Total
Tons Extracted			18,00,000.00	20,00,000.00	9,00,000.00	47,00,000.00
Ratio			38.30	42.55	19.15	100.00
Depreciation On 16,00,000 incurred in 2018			612765.9574	680851.0638	306382.9787
For Development Cost Rs.$ 16,00,000 Incurred in 2018