Question

A coal company invests $12 million in a mine estimated to have 20 million tons of coal and no salvage value. It is expected that the mine will be in operation for 5 years. In the first year, 1,000,000 tons of coal are extracted and sold. What is the depletion expense for the first year?

Answer 1

Answer:

600,000

Explanation:

The unit of the activity depreciation method is suited for the coal company. This method determines the depreciation amount based on the level of usage. The calculation of depreciation amount using a unit of activity is the first step.

Depreciation per unit is calculated as follows

Depreciation per unit for the coal company

= Cost of the asset/ expected usage

=$12,000,000/ 20,000,000 tons

=$0.6 per ton

In 1, 000,000 coal value was extratced,

Amount of depreciation = $0.6  x 1,000,000

=$600,000

Answer 2

Based on the information given the depletion expense for the first year is $600,000.

Using this formula

Depletion expense=Amount invested/Estimated  tons of coal× Tons of coal extracted

Let plug in the formula

Depletion expense($12 million/20 million tons)×1,000,000 tons

Depletion expense=0.6×1,000,000 tons

Depletion expense=$600,000

Inconclusion the depletion expense for the first year is $600,000.

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