Platak,Inc.,acquired a silver mine for $4,000,000.The company's survey estimates that 40,000 ounces of silver can be extracted from the mine,but environmental costs to close the mine will be $1,000,000.In the first year of operations,15,000 ounces of silver were extracted.Platak,Inc.,would recognize
A)depletion expense of $1,500,000.
B)depreciation expense of $1,500,000.
C)depletion expense of $1,875,000.
D)amortization expense of $1,875,000.
E)environmental expense of $1,000,000.

Question

Quizplus · Accepted Answer

Depletion expense is calculated by dividing the cost of acquisition ($4,000,000) by the estimated quantity of recoverable units of silver (40,000 ounces). This gives a depletion rate of $100 per ounce. Therefore, depletion expense for the first year of operations (15,000 ounces extracted) would be $1,500,000 ($100 x 15,000). The environmental costs to close the mine are not included in the calculation of depletion expense.