Galt Company acquired a tract of land containing an extractable natural resource. Galt 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 4,000,000 tons, and that the land will have a value of $600,000 after restoration. Relevant cost information follows: If Galt maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material?

Question

Galt Company acquired a tract of land containing an extractable natural resource. Galt 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 4,000,000 tons, and that the land will have a value of $600,000 after restoration. Relevant cost information follows:  If Galt maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material?

Quizplus · Accepted Answer

Depletion expense is calculated as follows: 
Depletion expense per ton = 
(Total cost - Estimated residual value) 
/ Estimated recoverable units 
= (($2,500,000 + $600,000) - $600,000) 
/ 4,000,000 
= $1.75 per ton

Galt Company Acquired a Tract of Land Containing an Extractable