Question

n 2018, the Marion Company purchased land containing a mineral mine for $1,640,000. Additional costs of $568,000 were incurred to develop the mine. Geologists estimated that 600,000 tons of ore would be extracted. After the ore is removed, the land will have a resale value of $108,000.

To aid in the extraction, Marion built various structures and small storage buildings on the site at a cost of $210,000. These structures have a useful life of 10 years. The structures cannot be moved after the ore has been removed and will be left at the site. In addition, new equipment costing $90,000 was purchased and installed at the site. Marion does not plan to move the equipment to another site, but estimates that it can be sold at auction for $6,000 after the mining project is completed.

In 2018, 54,000 tons of ore were extracted and sold. In 2019, the estimate of total tons of ore in the mine was revised from 600,000 to 691,000. During 2019, 90,000 tons were extracted.

Required:
1. Compute depletion and depreciation of the mine and the mining facilities and equipment for 2018 and 2019. Marion uses the units-of-production method to determine depreciation on mining facilities and equipment.
2. Compute the book value of the mineral mine, structures, and equipment as of December 31, 2019.

Answer 1

	Depletion and Depreciation
1	Computation depletion and depreciation of the mine and the mining facilities and equipment for 2018 and 2019
		2018	2019
	Depletion	$189,000	$2,70,000
	Depreciation for Structures	$18,900	$27,000
	Depreciation for Equipment	$7,560	$10,800
	Cost of Mineral Mine
	Purchase Price	$ 16,40,000
	Development Cost	$ 5,68,000
		22,08,000
	Depletion for the year 2018
	Depletion per ton =	($22,08,000-$1,08,000)/6,00,000 tons =	$3.5 per ton
	2018 Depletion =	( $3.5 * 54,000 tons )    =	$ 1,89,000
	2019 Depletion
	Revised Depletion Rate    =	(( $22,08,000-$1,89,000)-$1,08,000)/(6,91,000-54,000) tons	$3 per ton
	2019 Depletion	( $3 * 90,000 tons )    =	$2,70,000
	2018 Depreciation for Structure
	Depletion per ton =	( $2,10,000/ $6,00,000)	$0.35
	2018 Depreciation =	( $0.35* 54,000 tons)    =	$18,900
	2019 Depreciation for Structure
	Revised Depletion Rate    =	($2,10,000- $18,900)/(6,91,000-54,000) tons =	$0.3 per ton
	2019 Depreciation    =	($0.3 * 90,000 tons)      =	$27,000
	2018 Depreciation for Equipment
	Depreciation per ton =	(90,000-6,000)/6,00,000 tons      =	$0.14 per ton
	2018 Depreciation =	($0.14 * 54,000 tons)	$7,560
	2019 Depreciation for Equipment
	Revised Depletion Rate    =	($90,000-$7,560-6,000)/ (6,91,000-54,000) tons    =	$0.12 per ton
	2019 Depreciation    =	($0.12 * 90,000)	$10,800
2		Book Value
	Mineral Mine	$17,49,000
	Structures	$1,64,100
	Equipment	$71,640
	Mineral Mine
	Cost		$22,08,000
	Less : Accumulated Depreciation
	2018 Depreciation	$1,89,000
	2019 Depreciation	$270,000	$4,59,000
	Book Value		$17,49,000
	Structures
	Cost		$2,10,000
	Less : Accumulated Depreciation
	2018 Depreciation	$18,900
	2019 Depreciation	$27,000	$45,900
	Book Value		$1,64,100
	Equipments
	Cost		$90,000
	Less : Accumulated Depreciation
	2018 Depreciation	$7,560
	2019 Depreciation	$10,800	$18,360
	Book Value		$71,640