On January 1, Year 1, Gemstone Mining Company (GMC) paid $10,500,000 cash to pur
ID: 2338908 • Letter: O
Question
On January 1, Year 1, Gemstone Mining Company (GMC) paid $10,500,000 cash to purchase the rights to extract raw stone from a surface pit estimated to hold 50,000 pounds of useable matertal. GMC extracted 10.000 pounds of stone In Year1. 20,000 pounds of stone In Year 2, and 25,000 pounds of stone In Year 3. The rights to the surface pit were expected to have a $500,000 salvage value at the end of Year 3. Which of the following statements models shows how recognizing depletion expense will affect GMC's Year 1 financial statements? Balance sheet Assets Income Statement Stone Cash+Reserves LiabEquityRev ANA (2, 000,000)NA 2,000,000)NA NA(2,000,000)NA 2,000,000) NA Cash Flow Statement NA Exp. |=| Net Inc , 000,0002,000, 000) - 2 000, 0001 (2,000,000)|(2,000,000) NA(2,000,000)NA 2,000,000) NA - NA NA NA. NA(2,000,000)NA 2,000,000) NA NA NA (2,000,000) Muitiple Choice Option A Option b Option C Option DExplanation / Answer
Answer
Salvage Value = $ 500,000
Amount to be depleted over period = 10500000 – 500000 = $ 10,000,000
Expected extraction over period = 50,000 pounds
Depletion expense = 10,000 pounds x $ 200 per pound = $ 2,000,000
BUT recognition of Depletion expense will not lead to any Cash Flows, hence Option ‘B’ is wrong.