Giger Company acquired a tract of land containing an extractable mineral resource.Giger is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the mineral 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: If Giger maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material?

Question

Giger Company acquired a tract of land containing an extractable mineral resource.Giger is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the mineral 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:  If Giger maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material?

Quizplus · Accepted Answer

Depletion expense per ton of extracted material = Total cost / Total recoverable tons

Total cost = Purchase price + Restoration costs
Purchase price = $12,000,000 / 5,000,000 tons = $2.40 per ton
Restoration costs = $1,000,000

Total cost = $3.40 per ton
Depletion expense per ton of extracted material = $3.40 / 2,500,000 tons (half of the total recoverable tons)
Depletion expense per ton of extracted material = $1.36 per ton, which rounds up to $1.40 per ton. Therefore, the best choice is B.

Giger Company Acquired a Tract of Land Containing an Extractable