Khamsah Mining Company purchased a tract of mineral land for $900,000. It is estimated that this tract will yield 120,000 tons of ore with sufficient mineral content to make mining and processing profitable. It is further estimated that 6,000 tons of ore will be mined the first and last year and 12,000 tons every year in between. The land will have a residual value of $30,000.
The company builds necessary structures and sheds on the site at a cost of $36,000. It is estimated that these structures can serve 15 years but, becuase they must be dismantled if they are to be moved, they have no salvage value. The company does not intend to use the buildings elsewhere. Mining machinery installed at the mine was purchased secondhand at a cost of $60,000. This machinery cost the former owner $150,000 and was 50% depreciated when purchased. Khamsah Mining estimates that about half of this machinery will still be useful when the present mineral resources have been exhausted but that dismantling and removal costs will just about offset its value at that time. The company does not intend to use hte machinery elsewhere. The remaining machinery will last until about one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery.
(a) As chief accountant for the company, you are to prepare a schedule showing estimated depletion and depreciation costs for esach year of the expected life of the mine.
(b) Also compute the depreciation and depletion for the first year assuming actual production of 5,000 tons. Nothing occured during the year to cause the company engineers to change their estimates of either mineral resoures or the life of the structures and equipment.