In February 2012, Gemstone Industries purchased the Opal Mine at a cost of $20,000,000. The mine is estimated to contain 500,000 carats of stone and to have a residual value of $1,000,000 after mining operations are completed. During 2012, 50,000 carats of stone were removed from the mine and sold. In this situation:
A) The book value of the mine is $19,000,000 at the end of 2012.
B) The amount of depletion deducted from revenue during 2012 is $1,900,000.
C) The amount of depletion deducted from revenue during 2012 is $1,000,000.
D) The mine is classified as an intangible asset and amortized over a period not to exceed 40 years.

Question

Quizplus · Accepted Answer

Depletion is the process of allocating the cost of a natural resource over the period of its extraction and sale. In this case, the cost of the mine ($20,000,000) is allocated over the estimated 500,000 carats, resulting in a depletion rate of $40 per carat. Since 50,000 carats were removed and sold in 2012, the depletion expense for that year would be $2,000,000 (50,000 x $40). However, the residual value of the mine ($1,000,000) must also be considered in the depletion calculation, resulting in a net depletion expense of $1,900,000 ($2,000,000 - $100,000). Option A is incorrect because the book value of the mine at the end of 2012 would be $18,000,000 ($20,000,000 - $2,000,000 depletion expense). Option C is incorrect because it does not consider the residual value of the mine. Option D is incorrect because the mine is a tangible asset, not an intangible asset.

In February 2012, Gemstone Industries Purchased the Opal Mine at a Cost