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

Question

Quizplus · Accepted Answer

The depreciation is calculated based on the units of production method. The cost per tonne is $12 million / 20 million tonnes = $0.60 per tonne. For the first year, 1,000,000 tonnes were extracted, so the depreciation is 1,000,000 tonnes * $0.60/tonne = $600,000.

A Coal Company Invests $12 Million in a Mine Estimated