Monroe Minerals Company purchased a copper mine for $125,000,000. The mine was expected to produce 50,000 tons of copper over its useful life. During Year 1, the company extracted 7,000 tons of copper. The copper was sold for $5,500 per ton. Assume that the company incurred $8,750,000 in operating expenses during Year 1. Based on this information, how much net income would Monroe report in Year 1?

Question

Quizplus · Accepted Answer

To calculate net income, we need to first calculate the revenue and subtract the operating expenses.

Revenue = Tons of Copper Extracted * Selling Price per Ton 
Revenue = 7,000 * $5,500 = $38,500,000

Operating Expenses = $8,750,000

Net Income = Revenue - Operating Expenses 
Net Income = $38,500,000 - $8,750,000 
Net Income = $29,750,000

However, we need to adjust for the depletion expense.

Depletion Expense = (Cost of Mine - Residual Value) / Estimated Tons of Copper 
Depletion Expense = ($125,000,000 - 0) / 50,000 
Depletion Expense = $2,500

Depletion expense for Year 1 = Depletion Expense per Ton * Tons of Copper Extracted 
Depletion Expense for Year 1 = $2,500 * 7,000 = $17,500,000

Adjusted Net Income = Net Income - Depletion Expense for Year 1 
Adjusted Net Income = $29,750,000 - $17,500,000 
Adjusted Net Income = $12,250,000

Therefore, the correct answer is B) $12,250,000.

Monroe Minerals Company Purchased a Copper Mine for $125,000,000