Cavallo Company acquired a tract of land containing an extractable natural resource.Cavallo 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 2,500,000 tons and that the extraction will be completed in five years.Relevant cost information follows:

What should be the depletion charge per ton of extracted material?
A)$4.00
B)$4.37
C)$3.97
D)$3.60

Question

Cavallo Company acquired a tract of land containing an extractable natural resource.Cavallo 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 2,500,000 tons and that the extraction will be completed in five years.Relevant cost information follows:

What should be the depletion charge per ton of extracted material?

What should be the depletion charge per ton of extracted material?
A)$4.00 
B)$4.37 
C)$3.97 
D)$3.60

Quizplus · Accepted Answer

Depletion cost per ton = (Total cost - residual value) / Total units extracted
Total cost = $11,600,000 (purchase price + restoration cost)
Residual value = $800,000 (salvage value of land after restoration)
Total units extracted = 2,500,000 tons
Depletion cost per ton = ($11,600,000 - $800,000) / 2,500,000 tons = $4.37 per ton. Therefore, the correct answer is B.

Cavallo Company Acquired a Tract of Land Containing an Extractable