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5 July, 08:30

Crowder Company acquired a tract of land containing an extractable natural resource. Crowder is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 5,000,000 tons and that the land will have a value of $1,000,000 after restoration. Relevant cost information follows:

Land $9,000,000

Estimated restoration costs 1,500,000

If Crowder maintains no inventories of extracted material, what should be the depletion expense per ton of extracted material?

a. $2.10

b. $1.90

c. $1.80

d. $1.60

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  1. 5 July, 11:45
    0
    B) $1.90

    Explanation:

    total reserves = 5,000,000 tons

    value after restoration = $1,000,000

    land cost:

    land $9,000,000

    restoration costs $1,500,000

    total depreciable value = $9,000,000 + $1,500,000 - $1,000,000 = $9,500,000

    using the units of depletion depreciation method, the depletion expense per ton = total depreciable value / total reserves = $9,500,000 / 5,000,000 tons = $1.90 per ton

    this means that for every ton of extracted material, the company must record a $1.90 depletion expense.
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