In: Accounting
Last Chance Mine (LCM) purchased a coal deposit for $2,214,900. It estimated it would extract 20,700 tons of coal from the deposit. LCM mined the coal and sold it, reporting gross receipts of $1.44 million, $8.2 million, and $3.2 million for years 1 through 3, respectively. During years 1–3, LCM reported net income (loss) from the coal deposit activity in the amount of ($12,800), $590,000, and $540,000, respectively. In years 1–3, LCM actually extracted 21,700 tons of coal as follows: (Leave no answer blank. Enter zero if applicable. Enter your answers in dollars and not in millions of dollars.)
(1) | (2) | Depletion (2)/(1) | Tons Extracted per Year | ||||||||||||||
Tons of Coal | Basis | Rate | Year 1 | Year 2 | Year 3 | ||||||||||||
20,700 | $2,214,900 | $107.00 | 4,700 | 11,700 |
5,300 |
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Answer is complete but not entirely correct.
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Based on the information available, we can calculate the Depletion expense per year as follows:-
Step 1:- Calculate the depletion expense per ton of coal
Calculate the depletion expense per ton of coal extracted:-
Depletion expense = $2,214,900/20,700 tons
Depletion expense = $107 per ton
Step 2:- Calculate the depletion expense for Years 1- 3
Year | No.of units extracted | Depletion expense |
1 | 4,700 | 502,900 |
2 | 11,700 | 1,251,900 |
3 | 5,300 | 460,100 |
Total | 2,214,900 |
The Depletion expense for the first 2 years are calculated as :- No.of units extracted * Depletion per unit
1st year = 4,700 * 107 per unit = $502,900
2nd year = 11,700 * 107 per unit = $1,251,900
However, for the 3rd year, since the total number of units extracted is higher than the estimated useful life of the coal deposit, the depletion expense would be limited to the amount left to be depleted.
Hence Depletion expense for the 3rd year = $2,214,900 - $502,900(1st year depletion) - $1,251,900(2nd year depletion)
Depletion expense for the 3rd year = $460,100