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In 2017, GREEN CORPORATION acquired a silver mine in Benguet. Because the mine is located deep...

  1. In 2017, GREEN CORPORATION acquired a silver mine in Benguet. Because the mine is located deep in the Benguet mountains, Green was able to acquire the mine for the low price of P50,000.

In 2018, Green constructed a road to the silver mine costing P5,000,000. Improvements to the mine made in 2018 cost P750,000. Because of the improvements to the mine and the surrounding land, it is estimated that the mine can be sold for P600,000 when the mining activities are complete.

During 2019, five buildings were constructed near the mine site to house the mine workers and their families. The total cost of the five buildings was P1,500,000. Estimated residual value is P250,000. In 2017, geologists estimated 4 million tons of silver ore could be removed from the mine for refining.

During 2020, the first year of operations, only 5,000 tons of silver ore were removed from the mine. However, in 2021, workers mined 1 million tons of silver. During that same year, geologists discovered that the mine contained 3 million tons of silver ore in addition to the original 4 million tons. Improvements of P275,000 were made to the mine early in 2021 to facilitate the removal of the additional silver.

Early in 2022, an additional building was constructed at a cost of P225,000 to house the additional workers needed to excavate the added silver. This building is not expected to have any residual value.

In 2022, 2.5 million tons of silver were mined and costs of P1,100,000 were incurred at the beginning of the year for improvements to the mine.

Requirements:

  1. Depletion from 2020 to 2022.
  2. Depreciation from 2020 to 2022.

Solutions

Expert Solution

  • Depletion:- Depletion means reduction/ exhaution of resources. It is genreally used in case of natural resources. Formula to calulate Depletion .
  • Depreciation:- Depreciation means reduction in value of asset over a period of time. Formula for straight line basis of depreciation . Since here the assets will be used only till the extraction of mines, the depreciation is also to be recognized in terms of mine output. So the formula will be same as depletion.

Part (a) Calculation of Depletion from 2020 to 2022.

For 2020:

Calculation of Depletion per ton

Cost (Working Note 1) = 73,00,000.00

Residual Value (given)= 6,00,000.00

Estimated extraction (given)= 4 million tons = 40,00,000.00 tons

Depletion per ton=

Depletion for 2020= Number of tons withdrawn in 2020 Rate per ton

Working Note 1:

Calculation of Original Cost

Particulars Amount (in P)
Cost of Acquisition in 2017 50,000.00
Construction of road in 2018 to the silver mine 50,00,000.00
Cost of improvement of mine 7,50,000.00
Cost of constructing buildings in 2019 15,00,000.00
Total Original Cost 73,00,000.00

For 2021:

Calculation of Depletion per ton

Cost (Working Note 2) = 77,91,625.00

Estimated extraction (Working note 3) = 69,95,000.00

Depletion per ton=

Depletion for 2021= Number of tons withdrawn in 2021 Rate per ton

     

Working Note 2:

Calculation of Cost in 2021

Particulars Amount (in P)
Cost of mine at end of 2020 73,00,000.00
Add:- Improvement in 2021 2,75,000.00
Add: Cost of construction of building 2,25,000.00
Less- Depletion charge for 2020 8,375.00
Balance of cost after depletion of 2020 77,91,625.00

Working Note 3:

Calculation of Estmated extraction in 2021

In the beginning it was estimated that silver ore are 4 million but in 2021 it was found that additionally 3 million of silver ore there.

Estimate Extraction in 2021= Estimated in opening - Extracted in 2020 + Additional found in 2021

  

For 2022:

Calculation of Depletion per ton

Cost (Working Note 4) = 77,77,625.00

Estimated extraction (Working note 5) = 59,95,000.00

Depletion per ton=

Depletion for 2022= Number of tons withdrawn in 2022 Rate per ton

  

Working Note 4:

Calculation of Cost in 2022

Particulars Amount (in P)
Cost of mine at end of 2021 77,91,625.00
Add:- Improvement in 2022 11,00,000.00
Less- Depletion charge for 2021 11,14,000.00
Balance of cost after depletion of 2021 77,77,625.00

   

Working Note 5:

Calculation of Estmated extraction in 2021

Estimate Extraction in 2022= Estimated in opening - Extracted in 2021 + Additional found in 2022

  

Total depletion from 2020 to 2022

Part (b) Calculation of Depreciation from 2020 to 2022.

For 2020:

Cost of building (given)=15,00,000.00

Residual Value (given)= 2,50,000.00

Estimated extraction (given)= 4 million tons = 40,00,000.00 tons

Depreciation per ton =

Deprectiaon for 2020= Number of tons withdrawn in 2022 Rate per ton

  

For 2021:

Cost of building=

Residual Value (given)= 2,50,000.00

Estimated extraction (Working note 3) = 69,95,000.00

Depreciation per ton =

Deprectiaon for 2021= Number of tons withdrawn in 2021 Rate per ton

  

For 2022:

Cost of building=

Residual Value (given)= 2,50,000.00

Estimated extraction (Working note 5) = 59,95,000.00

Depreciation per ton =

Deprectiaon for 2022= Number of tons withdrawn in 2022 Rate per ton

  

Total depreciation from 2020 to 2022

ekkarill92 answered 2 years ago
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