The Orser Mining Company acquired a gold mine for $8,000,000.It is estimated that 40,000 ounces of gold can be extracted from the mine.In the first year of operations,15,000 ounces of gold were extracted.The Orser Mining Company would recognize:
A)An increase in profit of $3,000,000
B)Depreciation expense of $3,000,000
C)Cost of goods sold of $3,000,000
D)Depletion expense of $3,000,000

Question

Quizplus · Accepted Answer

The Orser Mining Company cannot recognize any increase in profit, depreciation expense or cost of goods sold based solely on the acquisition of the mine or the amount of gold estimated to be extracted. Instead, the appropriate recognition is depletion expense, which is calculated as the cost of the mine ($8,000,000) divided by the estimated units of gold available (40,000 ounces). Therefore, the depletion expense for one ounce of gold is $200. In the first year, 15,000 ounces were extracted, so the depletion expense would be $3,000,000 (15,000 ounces x $200 per ounce).

The Orser Mining Company Acquired a Gold Mine for $8,000,000