Concept explainers
1.
Calculate the total expenses that are included in the income statement of company A for 2016.
1.
Explanation of Solution
Depletion: Depletion is a process in which the cost of natural resources like oil reserves, mineral deposits, and timber tracts, is allocated equally over the extraction or harvesting period of the asset. When a resource is depleted, the value of resource is decreased and the value of extracted inventory obtained is increased. So, depletion is recorded on the balance sheet, and not on the income statement. But the Cost of Goods Sold expense is recorded when the extracted inventory is sold.
Calculate the amount of total expenses that would be included in the income statement of company A for 2016 as follows:
Working note (1):
Calculate the depletion rate per ton.
Working note (2):
Calculate the depreciation rate per ton.
Working note (3):
Calculate the value of accretion.
Working note (4):
Calculate number of tons sold.
Working note (5):
Calculate the total expense of coal per ton.
Therefore, the total expense of Company A for 2016 is $606,300.
2.
Calculate the cost of inventory of Company A for the year ended December 31, 2016.
2.
Explanation of Solution
Calculate the cost of inventory of Company A for the year ended December 31, 2016 as follows:
Working note (6):
Calculate the total tons of coal produced during the year.
3.
Calculate the total expense of Company A for 2017, and assume the new estimation of the company indicates that the capacity of the mine is 500,000 tons.
3.
Explanation of Solution
Calculate the amount of total expense of Company A for 2017, and assume the new estimation of the company indicates that the capacity of the mine is 500,000 tons as follows:
Working note (7):
Calculate the new depletion rate per ton.
Note: The depletion expense for sold item is $165,000
Working note (8):
Calculate the depreciation rate per ton.
Note: The depreciation expense for sold item is $12,000
Working note (9):
Calculate the present value of mine for 2017.
Note: Assume the present value of mine is increased by 10%.
Working note (10):
Calculate the value of accretion for 2017.
Working note (11):
Calculate the total expense of coal per ton.
Working note (12):
Calculate number of tons sold.
Therefore, the total expense of Company A for 2017 is $1,508,424.
Want to see more full solutions like this?
Chapter 11 Solutions
Cengagenowv2, 1 Term Printed Access Card For Wahlen/jones/pagach’s Intermediate Accounting: Reporting And Analysis, 2017 Update, 2nd
- Raya's Mining Co purchased a mine for $8 million on July 1, 2014. The mine will generate an estimated 30 million tonnes of nickel. The mine has a residual value of $500 000, and the restoration cost at the end of the mine's useful life is estimated at $600 000. In the first year, 5 million tonnes of nickel were extracted. Prepare the journal entry to record the depletion expense for the first year, ended June 30, 2015.arrow_forwardMercury Inc. purchased equipment in 2016 at a cost of $400,000. The equipment was expected to produce 700,000units over the next five years and have a residual value of $50,000. The equipment was sold for $210,000 part waythrough 2018. Actual production in each year was: 2016 = 100,000 units; 2017 = 160,000 units; 2018 = 80,000units. Mercury uses units-of-production depreciation, and all depreciation has been recorded through the disposaldate.Required:1. Prepare the journal entry to record the sale.2. Assuming that the equipment was sold for $245,000, prepare the journal entry to record the sale.arrow_forwardOn July 1, 2017, Jungkook Mining Company purchased the rights to a mine. The total purchase price was P7,920,000 of which P240,000 was allocated to land. Estimated reserves were 1,600,000 tons. Jungkook expects to extract and sell 25,000 tons per month. Jungkook purchased new equipment on July 1, 2017. The equipment cost P3,960,000 and have a useful life of 8 years. However, after all the resources are removed, the equipment will be of no use and will be sold for P120,000. If sales and production conformed to expectations, what amount of depletion should the company recognize in 2017?arrow_forward
- On July 1, 2017, Jungkook Mining Company purchased the rights to a mine. The total purchase price was P7,920,000 of which P240,000 was allocated to land. Estimated reserves were 1,600,000 tons. Jungkook expects to extract and sell 25,000 tons per month. Jungkook purchased new equipment on July 1, 2017. The equipment cost P3,960,000 and have a useful life of 8 years. However, after all the resources are removed, the equipment will be of no use and will be sold for P120,000. If sales and production conformed to expectations, what amount of depletion should the company recognize in 2017? a. 700,000 b. 720,000 c.1,400,000 d. 1,440,000arrow_forwardOn January 1, 2018, Nickel Co. purchased a land for P12,000,000. The company expected to extract 2,000,000 tons of mine from this land over the next 20 years at which time, the residual value of the asset shall be zero. During 2018 and 2019 operations, 60,000 tons were mined each year and sold for P80 per ton. The estimate of the remaining lifetime capacity of the mine was raised to 2,400,000 tons at the start of 2020 and the residual value was to be P960,000. How much should be recognized as depletion in 2020 if the total production for 2020 is 100,000 tons? * P430,000 P450,000 P455,000 P470,000arrow_forwardIn 2017, Bodino Company paid P 4,000,000 to purchase land containing a total estimated 160,000 of extractable mineral deposits. The estimated value of the property after the mineral has been removed is P 800,000. Extraction activities began in 2018 and by the end of the year, 20,000 tons had been recovered and sold. In 2014, geological studies indicated that the total amount of mineral deposits had been underestimated by 60,000 tons. During 2019, 30,000tons were extracted, and 28,000 tons were sold. What is the depletion rate per ton in 2019? a. 12.73 c. 15.56 b. 14.00 d. 20.00arrow_forward
- On January 2, 2020, the Wally Company purchased land for P 450,000, from which it is estimated that 400,000 tons of ore could be extracted. It estimates that it will cost P 80,000 to restore the land, after which it could be sold for P 30,000. During 2020, the company mined 80,000 tons and sold 50,000 tons. During 2021, the company mined 100,000 tons and sold 120,000. At the beginning of 2022, the company spent additional P 100,000, which increased the reserves by 60,000 tons. In 2022, the company mined 140,000tons and sold 130,000 tons. The company uses a FIFO cost flow assumption.Required:a. Calculate the depletion included in the income statement and ending inventory for 2020, 2021 and 2022.arrow_forwardOn January 1, 2017, Henry Manufacturing Corporation purchased a machine for $40,600,000. Henry's management expects to use the machine for 33,000 hours over the next six years. The estimated residual value of the machine at the end of the sixth year is $45,000. The machine was used for 3,600 hours in 2017 and 5,000 hours in 2018. Calculate the book value of the machine at the end of 2018 if the company uses the units-of-production method of depreciation. (Round any intermediate calculations to two decimal places, and your final answer to the nearest dollar.)arrow_forwardOn January 2, 2020, the Wally Company purchased land for P 450,000, from which it is estimated that 400,000 tons of ore could be extracted. It estimates that it will cost P 80,000 to restore the land, after which it could be sold for P 30,000. During 2020, the company mined 80,000 tons and sold 50,000 tons. During 2021, the company mined 100,000 tons and sold 120,000. At the beginning of 2022, the company spent additional P 100,000, which increased the reserves by 60,000 tons. In 2022, the company mined 140,000tons and sold 130,000 tons. The company uses a FIFO cost flow assumption. Required:a. Calculate the depletion included in the income statement and ending inventory for 2020, 2021 and 2022. Note. Please include all the necessary information and computations for better understandingarrow_forward
- REMAX Ltd. purchased a warehouse on January 2, 2016, for $440,000. The straight-line method is used, and useful life is estimated to be 10 years, with a $40,000 residual value. At the beginning of 2022 REMAX spent $96,000 on major renovations. After the renovations, REMAX estimated that the useful life would be extended by 4 years, and the residual value would be $20,000. Calculate the depreciation expense for 2022.arrow_forwardOn January 2, 2019, Whistler Company purchased land for $490,000, from which it is estimated that 420,000 tons of ore could be extracted. It estimates that the present value of the cost necessary to restore the land is $55,000, after which it could be sold for $33,000. During 2019, Whistler mined 73,000 tons and sold 55,000 tons. During 2020, Whistler mined 96,000 tons and sold 91,000 tons. At the beginning of 2021, Whistler spent an additional $90,000, which increased the reserves by 64,000 tons. In 2021, Whistler mined 145,000 tons and sold 145,000 tons. Whistler uses a FIFO cost flow assumption. Required: If required, round the depletion rate to the nearest cent and round the final answers to the nearest dollar. 1. Calculate the depletion included in the income statement and ending inventory for 2019, 2020, and 2021. 2019 Depletion deducted from income $fill in the blank Depletion included in inventory $fill in the blank 2020 Depletion deducted from income…arrow_forwardOn January 2, 2019, Whistler Company purchased land for $450,000, from which it is estimated that 350,000 tons of ore could be extracted. It estimates that the present value of the cost necessary to restore the land is $59,000, after which it could be sold for $21,000. During 2019, Whistler mined 73,000 tons and sold 51,000 tons. During 2020, Whistler mined 95,000 tons and sold 103,000 tons. At the beginning of 2021, Whistler spent an additional $90,000, which increased the reserves by 57,000 tons. In 2021, Whistler mined 131,000 tons and sold 124,000 tons. Whistler uses a FIFO cost flow assumption. If required, round the depletion rate to the nearest cent and round the final answers to the nearest dollar. 1. Calculate the depletion included in the income statement and ending inventory for 2019, 2020, and 2021. 2019 Depletion deducted from income $ Depletion included in inventory $ 2020 Depletion deducted from income $ Depletion included in inventory $ 2021…arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning