Intermediate Accounting I 5 p11-7

P11-7 on page 610 – Marion Company – Depletion; change in estimate

Problem 11-7

Requirement 1

Compute depletion and depreciation of the mine and the mining facilities and equipment for 2011 and 2012. Marion uses the units-of-production method to determine depreciation on mining facilities and equipment.

Total cost of mineral mine                                  = purchase price+ development costs

= $1,600,000+600,000 = $2,200,000

Depletion rate per ton= ($2,200,000-100000)/400000= $5.25 per ton

Therefore, 2011 depletion     = $5.25 x 50,000 tons = $262,500

      2012 depletion:

Revised depletion rate = [($2,200,000 – 262,500) – 100,000]/ (487,500 – 50,000) = $4.20

2012 depletion     = $4.20 x 80,000 tons = $336,000

Depreciation:

      Structures:

Depreciation per ton = $150,000/400,000 tons = $0.375 per ton

2011 depreciation      = $0.375 x   50,000 tons = $18,750

      2012 depreciation:

Revised depreciation rate = ($150,000 – 18,750)/(487,500 – 50,000) = $0.30

Therefore, 2012 depreciation    = $0.30 x 80,000 tons = $24,000

Equipment:

Depreciation per ton = ($80,000 – 4,000)/ 400,000 tons = $0.19 per ton

2011 depreciation     = $0.19 x 50,000 tons = $9,500

      2012 depreciation:

Revised depreciation rate =   [($80,000 – 9,500) – 4,000]/ 487,500 – 50,000 tons=$0.152

2012 depreciation   = $0.152 x   80,000 tons = $12,160

 

Requirement 2

Compute the book value of the mineral mine, structures, and equipment as of December 31, 2012.

Mineral mine:

Cost                                                                                              $ 2,200,000

Less accumulated depletion:

2011 depletion                                              $262,500

2012 depletion                                               336,000                    598,500

Book value, December 31, 2012                                          $1,601,500

 

Structures:

Cost                                                                                                 $ 150,000

Less accumulated depreciation:

2011 depreciation                                           $18,750

2012 depreciation                                            24,000                      42,750

Book value, December 31, 2012                                             $107,250

 

Equipment:

Cost                                                                                                   $ 80,000

Less accumulated depreciation:

2011 depreciation                                             $ 9,500

2012 depreciation                                             12,160                      21,660

Book value, December 31, 2012                                               $58,340

Requirement 3

Discuss the accounting treatment of the depletion and depreciation on the mine and mining facilities and equipment.

The depletion and depreciation on the mine and mining facilities and equipment used in the extraction of the natural resources are usually treated as part of the product cost. This implies that, just as the depreciation on the manufacturing equipment that is often included in the inventory cost, they are included in the cost of the inventory of the mineral.  When the mineral is sold, the depreciation and depletion on the mine and mining facilities and equipment are then included in the cost of goods sold in the income statement.

For instance, all of the depletion and depreciation of 2011 is included in the cost of goods sold in the financial year ending 2011 because all of the ore was sold in that year.  However, a portion of both the depletion and depreciation for the year remains in the inventory since not all of the extracted ore in 2012 was sold.

Get a 10 % discount on an order above $ 100
Use the following coupon code :
SKYSAVE