In 2019, ABC purchased a silver mine for $10,200,000 with removable silver estimated at 1,000,000 tons....

In 2019, ABC purchased a silver mine for $10,200,000 with removable silver estimated at 1,000,000 tons. ABC is required to mitigate environmental damage after mining the silver and expects to spend $5,105,126.25 five years from now in order to do so. ABC’s cost of capital for similar investments is 5%. The property has an estimated value of $500,000 after the gold has been extracted. The company incurred $2,500,000 of intangible development costs getting the mine up and running. During 2019, 200,000 tons were removed and 150,000 tons were sold.

What is the amount of depletion that ABC should expense for 2019?

Expert Solution

Purchase price	10,200,000
Add: PV site restoration charges	4,000,000
Less: PV of residual value	(391,763)
Total depreciable value	13,808,237

Life	1,000,000	tons
Used in 2019	200,000	tons

Depreciation	2,761,647


PV factor at 5 years	0.78	A

Site restoration charges	5,105,126.25	B
Residual value	500,000.00	C

PV of Site restoration charges	4,000,000.00	A*B
Residual value	391,763.08	A*C

Units of production is appropriate method in given case for depreciation of assets and accordingly has been used.

ekkarill92 answered 1 year ago

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