Question

In: Accounting

Last Chance Mine (LCM) purchased a coal deposit for $2,214,900. It estimated it would extract 20,700...

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

Answer is complete but not entirely correct.

Year Depletion Expense
1 $479,747selected answer incorrect
2 $1,194selected answer incorrect
3 $540,879

Solutions

Expert Solution

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


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