In February 2014, 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 2014, 50,000 carats of stone were removed from the mine and sold. In this situation:

Question

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Depletion is the process of allocating the cost of natural resources over the period of their extraction or use. To calculate depletion expense, we need to know the total cost of the asset (minus its residual value), as well as the total estimated quantity of the resource. In this case, the depletion rate would be ($20,000,000 - $1,000,000) / 500,000 carats, or $38 per carat. Therefore, the depletion deducted from revenue in 2014 would be $1,900,000 (50,000 carats sold x $38 per carat). Choice A is incorrect because the book value of the mine is calculated by subtracting accumulated depreciation (or depletion) from the initial cost, so it would depend on how much depletion was taken in prior years. Choice C is incorrect because the residual value is not relevant to the calculation of depletion expense. Choice D is incorrect because the mine is not an intangible asset, but a natural resource.

In February 2014, Gemstone Industries Purchased the Opal Mine at a Cost