Question

Exercise 11-17 Cost of a natural resource; depletion and depreciation; Chapters 10 and 11 [LO11-2, 11-3]

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,650,000 in 2018 for the mining site and spent an additional $730,000 to prepare the mine for extraction of the copper. After the copper is extracted in approximately four years, the company is required to restore the land to its original condition, including repaving of roads and replacing a greenbelt. The company has provided the following three cash flow possibilities for the restoration costs (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):

	Cash Outflow			Probability
1	$	430,000		15%
2		530,000		45%
3		730,000		40%

To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $260,000. After the copper is removed from this mine, the equipment will be sold for an estimated residual amount of $34,000. There will be no residual value for the copper mine. The credit-adjusted risk-free rate of interest is 12%.

The company expects to extract 11.3 million pounds of copper from the mine. Actual production was 2.9 million pounds in 2018 and 4.3 million pounds in 2019.

Required:
1. Compute depletion and depreciation on the mine and mining equipment for 2018 and 2019. The units-of-production method is used to calculate depreciation.

Answer 1

Answer.

Compute Depreciation Using units of production Method for 2018-2019

Depreciation per pound 2018                     =                    Cost-Residual Value

                                                                                                Estimated Extractable Pounds

$1700000+$730000-$0

11200000

= $0.207

=$ 0.207*15/100

=$ 3.105

Depletion for 2018           = 2900000 x $3.105

                                                = $9004500

Depletion for 2019

= 4300000 x $3.105

= $13351500

Equipment for 2019

Depletion                            =                                                      Cost-Residual Value

                                                                                                Estimated Extractable Pounds

= $260000-$34000

226000

=$0.12 Per Pound

Depletion of mines for 2019 = 2900000 x $$0.12

                                                       = $348000

Depletion for 2019 = 4300000 x $0.12

                                                =$516000