Carla Mining Company has purchased a tract of mineral land for $936,000. It is e
ID: 2526653 • Letter: C
Question
Carla Mining Company has purchased a tract of mineral land for $936,000. It is estimated that this tract will yield 124,800 tons of ore with sufficient mineral content to make mining and processing profitable. It is further estimated that 6,240 tons of ore will be mined the first and last year and 12,480 tons every year in between. (Assume 11 years of mining operations.) The land will have a salvage value of $31,200.
The company builds necessary structures and sheds on the site at a cost of $37,440. It is estimated that these structures can serve 15 years but, because they must be dismantled if they are to be moved, they have no salvage value. The company does not intend to use the buildings elsewhere. Mining machinery installed at the mine was purchased secondhand at a cost of $62,400. This machinery cost the former owner $156,000 and was 50% depreciated when purchased. Carla Mining estimates that about half of this machinery will still be useful when the present mineral resources have been exhausted, but that dismantling and removal costs will just about offset its value at that time. The company does not intend to use the machinery elsewhere. The remaining machinery will last until about one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery.
(a)
Estimated depletion cost
Year
Depletion
Estimated depreciation cost
Year
Building
Machinery (1/2)
Machinery (1/2)
Carla Mining Company has purchased a tract of mineral land for $936,000. It is estimated that this tract will yield 124,800 tons of ore with sufficient mineral content to make mining and processing profitable. It is further estimated that 6,240 tons of ore will be mined the first and last year and 12,480 tons every year in between. (Assume 11 years of mining operations.) The land will have a salvage value of $31,200.
The company builds necessary structures and sheds on the site at a cost of $37,440. It is estimated that these structures can serve 15 years but, because they must be dismantled if they are to be moved, they have no salvage value. The company does not intend to use the buildings elsewhere. Mining machinery installed at the mine was purchased secondhand at a cost of $62,400. This machinery cost the former owner $156,000 and was 50% depreciated when purchased. Carla Mining estimates that about half of this machinery will still be useful when the present mineral resources have been exhausted, but that dismantling and removal costs will just about offset its value at that time. The company does not intend to use the machinery elsewhere. The remaining machinery will last until about one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery.
Explanation / Answer
Cost per ton (Purchase Cost-Salvage Value) Total No of Units (936000-31200)/124800 tons $ 7.25 Depletion Expenses Cost per tone*units extracted Estimated depletion cost Year Ore mine extracts in tons Depletion $ 1st Yr. 6240 45240 2nd Yr. 12480 90480 3rd Yr. 12480 90480 4th Yr. 12480 90480 5th Yr. 12480 90480 6th Yr. 12480 90480 7th Yr. 12480 90480 8th Yr. 12480 90480 9th Yr. 12480 90480 10th Yr. 12480 90480 11th Yr. 6240 45240 Total 124800 904800