Question

Arizona Mining Company acquired property with copper ore reserves estimated at 2 million pounds for $1,800,000. The property will have an estimated value of $100,000 after the ore has been extracted. Before any ore could be re- moved, it was necessary to incur $500,000 of developmental costs. In the first year, 200,000 pounds were removed and 160,000 pounds of ore were sold; in the second year, 400,000 pounds were removed and 410,000 pounds were sold. In the course of the second year's production, discoveries were made that indicated that if an added $1,460,000 is spent on developmental costs during the third year, future removable ore will total 2.5 million pounds. After these added costs were incurred, production for the third year amounted to 510,000 pounds with sales of 450,000 pounds. Required Calculate depletion and cost of goods sold that the company reports on its income statement for each of the three years. Assume FIFO (first-in, first-out) inventory flow.

Answer 1

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Arizona Mining Company
Calculation of depletion expense	Amount $	Note
Cost of land	1,800,000.00	A
Less: Residual Value	100,000.00	B
Depreciable Value	1,700,000.00	C=A-B
Estimated ore available	2,000,000.00	D
Depletion cost per ton	0.85	E=C/D
Tonnage in 1st Year	200,000.00	F
Depletion Expense in 1st Year	170,000.00	G=E*F
Value of land remaining at the end of 1st Year	1,630,000.00	H=A-G
Tonnage in 2nd Year	400,000.00	I
Depletion Expense in 2nd Year	340,000.00	J=I*E
Value of land remaining at the end of 2nd Year	1,290,000.00	K=H-J
Add: Development costs	1,460,000.00	L
Revised cost of land	2,750,000.00	M=K+L
Less: Residual Value	100,000.00	See B
Depreciable Value	2,650,000.00	N=M-B
Estimated ore available	2,500,000.00	O
Depletion cost per ton	1.06	P=N/O
Tonnage in 3rd Year	510,000.00	Q
Depletion Expense in 3rd Year	540,600.00	R=P*Q

Calculation of cost of goods sold
Year	Tonnage	Cost per ton	Amount	Quantity sold	Cost per ton	Cost of Goods sold	Balance Quantity	Cost per ton	Balance $
1st	200,000.00	0.85	170,000.00	160,000.00	0.85	136,000.00	40,000.00	0.85	34,000.00
2nd	400,000.00	0.85	340,000.00	410,000.00	0.85	348,500.00	30,000.00	0.85	25,500.00
3rd	510,000.00	1.06	540,600.00	30,000.00	0.85	25,500.00	90,000.00	1.06	95,400.00
				420,000.00	1.06	445,200.00
				450,000.00		470,700.00

Final Answer
Year	Depletion Expense	Note	Cost of goods sold
1st	200,000.00	See F	136,000.00
2nd	340,000.00	See J	348,500.00
3rd	540,600.00	See R	470,700.00