Question

Depletion

On January 2, 2013, Spring Company purchased land for $500,000, from which it is estimated that 430,000 tons of ore could be extracted. It estimates that the present value of the cost necessary to restore the land is $71,000, after which it could be sold for $26,000.

During 2013, Spring mined 80,000 tons and sold 51,000 tons. During 2014, Spring mined 102,000 tons and sold 114,000 tons. At the beginning of 2015, Spring spent an additional $100,000, which increased the reserves by 50,000 tons. In 2015, Spring mined 132,000 tons and sold 132,000 tons. Spring uses a FIFO cost flow assumption.

1. Calculate the depletion included in the income statement and ending inventory for 2013, 2014, and 2015. Round the depletion rate to the nearest cent. If required, round the final answer to the nearest dollar.

2. Complete the natural resources section of the balance sheet on December 31, 2013, 2014, and 2015, assuming that an accumulated depletion account is used. Round the depletion rate per to the nearest cent. If required, round the final answers to the nearest dollar.

December 31, 2013
Mineral ore resources		$
Less: Accumulated depletion				$
				$
December 31, 2014
Mineral ore resources		$
Less: Accumulated depletion		$
				$
December 31, 2015
Mineral ore resources		$
Less: Accumulated depletion		$
				$

3. Assume Whistler's discount rate was 8%. What is the balance in the asset retirement obligation at 2013, 2014, and 2015? If required, round your answers to the nearest dollar.

Answer 1

1. Depletion is an accrual accounting technique used to allocate the cost of extracting natural resources such as timber, minerals and oil from the earth. Unlike depreciation and amortization, which mainly describe the deduction of expenses due to the aging of equipment and property, depletion is the actual physical depletion of natural resources by companies.
All costs incurred to bring an asset to operating condition are included in the cost of acquisition and are capitalized.Same principle applies to natural resources as well.

In case of natural resource cost includes:

a. Purchase cost of the asset

b. Exploration and drilling costs

c. Extraction and development cost

d. Restoration and rehabilitation costs

Cost of acquisition = $500,000+$71,000	5,71,000
Unit Depletion rate= (Cost of acquisition-Residual Value)/Estimated Units/tons
Cost per ton= (571000-26000)/430000	1.2674
Depletion of mine for year 2013 = 1.2674*80000	1,01,395

So the mine will be stated at $4,69,605 (=5,00,000+71,000?1,01,395) in balance sheet on Dec 31, 2013 but not all of the amount $1,01,395 will be recorded as depletion expense because the company had 29,000 ton of ore unsold at the end of the year. Here, the depletion expense will be calculated using the following formula:

Depletion Expense = Total Depletion of Mine ? Depletion Related to Unsold Extract Depletion Expense = $1,01,395 ? $1.2674 × 29,000 Depletion Expense in income statement for 2013 =$64,639 The net book value for 2014 is $ 4,69,605. With 1,02,000 tons of ore extracted in 2014, the depletion charge will be calculated as following: Depletion for 2014 = (1.2674*1,02,000) Depletion for 2014 = $ 1,29,279 So the mine will be stated at $3,40,326 (=4,69,605?1,29,279) in balance sheet on Dec 31, 2014 but not all of the amount $1,29,279 will be recorded as depletion expense because the company had 17,000 ton of ore unsold at the end of the year. Here, the depletion expense will be calculated using the following formula: Depletion Expense = Total Depletion of Mine ? Depletion Related to Unsold Extract Depletion Expense = $1,29,279 ? $1.2674 × 17,000 Depletion Expense in income statement for 2014 =$1,07,733 In 2015, the Company spent $ 1,00,000 which increased the reserves by 50,000. So now the estimated ores which can be extracted is as below: Estimated tons= 4,30,000-80,000-1,02,000+50,000 Estimated tons=2,98,000 New Unit Depletion rate= (Book value at beginning of year 2015+additional cost-Residual Value)/Estimated Units/tons Cost per ton= (3,40,326+1,00,000-26,000)/2,98,000 1.3904 Depletion of mine for year 2015 = 1.3904*1,32,000 Depletion of mine for year 2015 = $183,527 So the mine will be stated at $2,56,799 (=3,40,326+1,00,000?1,83,527) in balance sheet on Dec 31, 2015 but not all of the amount $1,83,527 will be recorded as depletion expense because the company had 17,000 ton of ore unsold at the end of the year. Here, the depletion expense will be calculated using the following formula: Depletion Expense = Total Depletion of Mine ? Depletion Related to Unsold Extract Depletion Expense = $1,83,527 ? $1.3904 × 17,000 Depletion Expense in income statement for 2015 =$1,59,891 2. December 31, 2013 Mineral ore resources 5,71,000 Less: Accumulated depletion 1,01,395 4,69,605 December 31, 2014 Mineral ore resources 4,69,605 Less: Accumulated depletion 129279 3,40,326 December 31, 2015 Mineral ore resources 3,40,326 Add: Additional Expenditure 1,00,000 Less: Accumulated depletion 183527 2,56,799 3. Asset Retirement obligation at beginning of year 2013 71,000 Accretion expense for 2013= $71000*8% 5,680 Asset Retirement obligation at end of year 2013 76,680 Accretion expense for 2014= $76680*8% 6,134 Asset Retirement obligation at end of year 2014 82,814 Accretion expense for 2015= $82814*8% 6,625 Asset Retirement obligation at end of year 2015 89,440