Question

Buffalo Mining Company has purchased a tract of mineral land for $1,296,000. It is estimated that this tract will yield 172,800 tons of ore with sufficient mineral content to make mining and processing profitable. It is further estimated that 8,640 tons of ore will be mined the first and last year and 17,280 tons every year in between. (Assume 11 years of mining operations.) The land will have a salvage value of $43,200. The company builds necessary structures and sheds on the site at a cost of $51,840. It is estimated that these structures can serve 15 years but, because they must be dismantled if they are to be moved, they have no salvage value. The company does not intend to use the buildings elsewhere. Mining machinery installed at the mine was purchased secondhand at a cost of $86,400. This machinery cost the former owner $216,000 and was 50% depreciated when purchased. Buffalo Mining estimates that about half of this machinery will still be useful when the present mineral resources have been exhausted, but that dismantling and removal costs will just about offset its value at that time. The company does not intend to use the machinery elsewhere. The remaining machinery will last until about one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery.

As chief accountant for the company, you are to prepare a schedule showing estimated depletion and depreciation costs for each year of the expected life of the mine. (Round per unit answers to 2 decimal places, e.g. 0.45 for computational purposes and final answers to O decimal places, e.g. 45,892.,) Estimated depletion cost Depletion Year 1st Yr. 13 Yr. 2nd Yr 3rd Yr 4th Yr sth Yr Vi 6th Yr 8th Yr 9th Yr 10th Yr Estimated depreciation cost YearBuilding Machinery (1/2) Machinery (1/2) 15t Yr. $ 2nd Yr 3rd Yr 4th Yr sth Yr 6th Yr Vi 8th Yr 9th Yr Vi 10th Yr 11th Yr. Also compute the depreciation and depletion for the first year assuming actual production of 7,200 tons. Nothing occurred during the year to cause the company engineers to change their estimates of either the mineral resources or the life of the structures and equipment. (Round per unit answers to 2 decimal places, e.g. 0.45 for computational purposes and final answers to 0 decimal places, e.g. 45,892.) Depletion Depreciation

Answer 1

a	Preparation of the schedule showing estimated depletion costs for each year of the expected life of the mone
	Depletion Base	$1296000-$43200
		1252800
	Yield in Tons	172800
	Per Ton Depletion	7.25
	Estimated Depletion Cost
	Yr	Depletion		Calculation
	1	62640		$7.25*8640
	2	125280		$7.25*17280
	3	125280		$7.25*17280
	4	125280		$7.25*17280
	5	125280		$7.25*17280
	6	125280		$7.25*17280
	7	125280		$7.25*17280
	8	125280		$7.25*17280
	9	125280		$7.25*17280
	10	125280		$7.25*17280
	11	62640		$7.25*8640
	Estimated cost of building necessary structures and sites	51840
	Yield in tonnes	120000
	Per Ton	0.432
	Mining machinery-50%	43200/120000
		0.36
	Mining machinery-50%	43200/120000*2
		0.72
	Estimated Depreciation Cost
	Yr	Building	Depreciation	Machinery-50%	Depreciation	Machinery-50%	Depreciation
	1	37325	$.432*8640	3110	$.36*8640	6221	$.72*8640
	2	74650	$.432*17280	6221	$.36*17280	12442	$.72*17280
	3	74650	$.432*17280	6221	$.36*17280	12442	$.72*17280
	4	74650	$.432*17280	6221	$.36*17280	12442	$.72*17280
	5	74650	$.432*17280	6221	$.36*17280	12442	$.72*17280
	6	74650	$.432*17280	6221	$.36*17280	12442	$.72*17280
	7	74650	$.432*17280	6221	$.36*17280	12442	$.72*17280
	8	74650	$.432*17280	6221	$.36*17280	12442	$.72*17280
	9	74650	$.432*17280	6221	$.36*17280	12442	$.72*17280
	10	74650	$.432*17280	6221	$.36*17280	12442	$.72*17280
	11	37325	$.432*8640	3110	$.36*8640	6221	$.72*8640
b	Computation of the depletion and depreciation for the first year assuming actual production of 7200 tons
	Depletion	$7.25*7200 tons	$52,200.00
	Depreciation
	Building	$.432*7200 tons	$3,110.40
	Machinery-50%	$.36*7200 tons	$2,592.00
	Machinery-50%	$.72*7200 tons	$5,184.00
	Total		$10,886.40