Question

Problem 11-5 (Part Level Submission)

Concord Mining Company has purchased a tract of mineral land for $972,000. It is estimated that this tract will yield 129,600 tons of ore with sufficient mineral content to make mining and processing profitable. It is further estimated that 6,480 tons of ore will be mined the first and last year and 12,960 tons every year in between. (Assume 11 years of mining operations.) The land will have a salvage value of $32,400.

The company builds necessary structures and sheds on the site at a cost of $38,880. 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 $64,800. This machinery cost the former owner $162,000 and was 50% depreciated when purchased. Concord 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.

Answer 1

Statement Showing Depletion Cost every year Year Yield (Tonnes) Depletion Cost 11 6 ,480 $ 46,980 2 1 2,960 $ 93,960 3 12,960$ 93,960 4 12,960$ 93,960 5 12,960 $ 93,960 6 12,960$ 93,960 12,960 $ 93,960 12.960 | S 93,960 93,960 10 12,960$ 93,960 11 6,480 $ 46,980 Total 129,600 $ 939,600 12,960S $ Note 1. Cost of Mineral Land 2. Less: Salvage Value 3. Depreciable Value (1-2) 972,000 (32,400) 939,600 This amount shall be expensed every year based on no of tonnes mined every year

Statement Showing Depletion Cost every year Year Building Mining Machine Total 11 $ 3,534.5 $ 1,620 $ 5,155 2 $ 3,534.5$ 3,240 $ 6,775 3 $ 3,534.5$ 3,240 $ 6,775 4 $ 3,534.5$ 3,240$ 6,775 5 $ 3,534.5$ 3,240$ 6,775 6 $ 3,534.5 $ 3,240$ 6,775 7 $ 3,534.5$ 3,240$ 6,775 8 $ 3,534.5$ 3,240$ 6,775 9$ 3,534.5$ 3,240$ 6,775 10$ 3,534.5$ 3,240$ 6,775 11 $ 3,534.5 $ 1,620 $ 5,155 Total $ 38,880 $ 32,400 $ 71,280

Note

The Building will be used for 11 years whereas the useful life is 15 years. Post the period of mining operations of 11 years, the machine will be dismantled and not used elsewhere. Therefore the Depreciable Value of $38,880 will be depreciated over a period of 11 Years. As regards the machinery, only half of the machine will be used during the mining operations process. Post that, the machine will be dismantled and become worthless. Thereofre, only half of the machine cost shall be depreciated during the mining operation. It Shall be charged based on the no.of tonnes mined. Value to be depreciated = $32,400