Question

In: Accounting

Skysong Mining Company has purchased a tract of mineral land for $1,008,000. It is estimated that...

Skysong Mining Company has purchased a tract of mineral land for $1,008,000. It is estimated that this tract will yield 134,400 tons of ore with sufficient mineral content to make mining and processing profitable. It is further estimated that 6,720 tons of ore will be mined the first and last year and 13,440 tons every year in between. (Assume 11 years of mining operations.) The land will have a salvage value of $33,600.

The company builds necessary structures and sheds on the site at a cost of $40,320. 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 $67,200. This machinery cost the former owner $168,000 and was 50% depreciated when purchased. Skysong 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.

Estimated depletion cost
Year		Depletion
1^st Yr.		$
2^nd Yr.
3rd Yr.
4^th Yr.
5^th Yr.
6^th Yr.
7^th Yr.
8^th Yr.
9^th Yr.
10^th Yr.
11^th Yr.

Estimated depreciation cost
Year	Building	Machinery (1/2)	Machinery (1/2)
1^st Yr.	$	$	$
2^nd Yr.
3rd Yr.
4^th Yr.
5^th Yr.
6^th Yr.
7^th Yr.
8^th Yr.
9^th Yr.
10^th Yr.
11^th Yr.

Also compute the depreciation and depletion for the first year assuming actual production of 5,600 tons. Nothing occurred during the year to cause the company engineers to change their estimates of either the mineral resources or the life of the structures and equipment. (Round per unit answers to 2 decimal places, e.g. 0.45 for computational purposes and final answers to 0 decimal places, e.g. 45,892.)

Depletion		$
Depreciation		$

Expert Solution

1. Depletion per ton = ($1,008,000 - $33,600) / 134,400 = 7.25 per ton

Year	Depletion	Calculation
1	48720	(6720 * 7.25)
2	97440	(13440 * 7.25)
3	97440	(13440 * 7.25)
4	97440	(13440 * 7.25)
5	97440	(13440 * 7.25)
6	97440	(13440 * 7.25)
7	97440	(13440 * 7.25)
8	97440	(13440 * 7.25)
9	97440	(13440 * 7.25)
10	97440	(13440 * 7.25)
11	48720	(6720 * 7.25)

2. Estimated depreciation cost

Depreciation per ton for Building = $40,320 / 134,400

= 0.3 per ton

Cost of machinery (1/2) = $67,200 / 2 = $33,600

Machinery (1/2) depreciation per ton = $33,600 / 134,400

= 0.25 per ton

Machinery (1/2) depreciation per ton = ($33,600 / 134,400) * 2

= 0.50 per ton

Year	Building	Calculation	Machinery (1/2)	Calculation	Machinery (1/2)	Calculation
1	2016	(6720 * 0.3)	1680	(6720 * 0.25)	3360	(6720 * 0.5)
2	4032	(13440 * 0.3)	3360	(13440 * 0.25)	6720	(13440 * 0.5)
3	4032	(13440 * 0.3)	3360	(13440 * 0.25)	6720	(13440 * 0.5)
4	4032	(13440 * 0.3)	3360	(13440 * 0.25)	6720	(13440 * 0.5)
5	4032	(13440 * 0.3)	3360	(13440 * 0.25)	6720	(13440 * 0.5)
6	4032	(13440 * 0.3)	3360	(13440 * 0.25)	3360	(6720 * 0.5)
7	4032	(13440 * 0.3)	3360	(13440 * 0.25)	0
8	4032	(13440 * 0.3)	3360	(13440 * 0.25)	0
9	4032	(13440 * 0.3)	3360	(13440 * 0.25)	0
10	4032	(13440 * 0.3)	3360	(13440 * 0.25)	0
11	2016	(6720 * 0.3)	1680	(6720 * 0.25)	0

3. Depletion = 7.25 * 5600 = $40,600

Depreciation = 5600 * 0.3 + 5600 * 0.25 + 5600 * 0.5

= $5,880

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