Greasy Ltd has a mining operation in Western Australia.It has reached the production stage with $10 million in costs carried forward.The company is leasing the mining rights to the area and at the beginning of this period the remaining term on the lease is 99 years.The expected production in tonnes from the area is 8 million.In the current period 500,000 tonnes were extracted.Revenues are expected to be highest in the early years of the mine's life and to decline at a rate of 15 per cent per annum.How much of the accumulated costs should be allocated to production this period (round to the nearest dollar)?
A) $101,010
B) $625,000
C) $75,000
D) $150,000
E) None of the given answers.

Question

Quizplus · Accepted Answer

To calculate the accumulated costs to be allocated to production this period, we need to use the depletion method. 
Depletion per tonne = accumulated costs / expected total production 
= $10,000,000 / 8,000,000 tonnes 
= $1.25 per tonne 
Depletion expense for current period = depletion per tonne x tonnes extracted in current period 
= $1.25 x 500,000 
= $625,000 (rounded to nearest dollar) 
Therefore, the answer is (B) $625,000.

Greasy Ltd Has a Mining Operation in Western Australia