Bychowski Company purchased land containing an estimated 10 million tons of ore for a cost of $3,300,000. The land without the ore is estimated to be worth $600,000. The company expects that all the usable ore can be mined in 10 years. Buildings costing $300,000 with an estimated useful life of 20 years were erected on the site. Equipment costing $360,000 with an estimated useful life of 10 years was installed. Because of the remote location, neither the buildings nor the equipment has an estimated residual value. During its first year of operation, the company mined and sold 450,000 tons of ore.
REQUIRED
1. Compute the depletion charge per ton.
2. Compute the depletion expense that Bychowski should record for the year.
3. Determine the depreciation expense for the year for the buildings, making it proportional to the depletion.
4. Determine the depreciation expense for the year for the equipment under two alternatives: (a) making the expense proportional to the depletion and (b) using the straight-line method.
5. Accounting Connection- Suppose the company mined and sold 250,000 tons of ore (instead of 450,000) during the first year. Would the change in the results in requirements 2 or 3 affect earnings or cash flows? Explain.