A gravel pit is purchased for $200,000 and has expected usable gravel equal to 40,000 truck loads,with yearly production as follows (in truck loads): year 1 = 10,500 ;year 2 = 9,600 ;year 3 = 8,300 ;year 4 = 6,700 ;year 5 = 4,900.When all the usable gravel has been extracted,the land can be sold for $30,000.What is the book value of the land after 3 years?

Question

Quizplus · Accepted Answer

The yearly production decreases linearly over the years, so we can find the total amount of gravel extracted after 3 years by:
Total = (10,500 + 9,600 + 8,300) x 3 = 87,900 truck loads

The remaining usable gravel is:
40,000 - 87,900 = -47,900 (negative because there is no more usable gravel left)

Since we can't have negative usable gravel, we assume all the usable gravel has been extracted after 3 years.

The depreciation per year is:
($200,000 - $30,000) / 40,000 = $4.25 per truck load

The book value after 3 years is:
$200,000 - (3 x $4.25 x 40,000) = $79,300

Therefore, the answer is C.

A Gravel Pit Is Purchased for $200,000 and Has Expected