Question

3. Intangible Assets a. Depletion Baker purchased a gravel field for $500,000. It should produce gravel for 8 years and then have a salvage value of $50,000. The DNR requires that the land be restored so that it can be used as a park. The anticipated restoration cost is $75,000. Money would be set aside for this purpose and would earn a 4% annual return. Calculate the depletion base At the end of the first year, 50,000 tons of gravel are removed and it is estimated that 450,000 tons remain at year-end Calculate the cost per ton of gravel for the first year.

Answer 1

The depletion base is the asset that is to be depleted. Depletion base refers to
the total cost associated with assets that are a natural resource too.
Depletion Base = Cost to Acquire + Cost to Explore + Cost to Develop
Calculation of Depletion base in the given case
Depletion base is	$500,000
The formula for the unit depletion rate is:
(Depletion base - Salvage value) ÷ Total units to be recovered
In the given case, using the above formula the cost per ton of gravel
for the first year can be calculated.
Depletion Base	500000
Salvage Value	50000
Total Tons that can be removed	500000
Cost per ton of gravel	(500000-50000)/500000
	$0.9 per ton of gravel for the first year.