Steel Rolling Company purchased a mine on Jan 1, 2015 for $500,000 and it is estimated to contain 30,000 tons of iron ore. There is no residual value. The company has extracted 2,500 tons of ore in 2015 and 3,800 tons of ore in 2016. What is the book value of the mine at the end of 2016? (Do not round your intermediate calculations).

Question

Quizplus · Accepted Answer

The depletion expense per ton can be calculated as follows:
(500,000 cost - 0 residual value) / 30,000 tons = $16.67 per ton

The depletion expense for 2015 and 2016 can be calculated as follows:
2015 depletion expense = 2,500 tons x $16.67 = $41,675
2016 depletion expense = 3,800 tons x $16.67 = $63,386

Therefore, the total depletion expense over the two years is $41,675 + $63,386 = $105,061.

The book value at the end of 2016 can be calculated as follows:
Cost - Accumulated depletion = $500,000 - $105,061 = $394,939

Therefore, the best choice is B, with a book value of $395,000 (rounded to the nearest thousand).

Steel Rolling Company Purchased a Mine on Jan 1, 2015