Perez Company acquires an ore mine at a cost of $1,400,000. It incurs additional costs of $400,000 to access the mine, which is estimated to hold 1,000,000 tons of ore. 180,000 tons of ore are mined and sold the first year. The estimated value of the land after the ore is removed is $200,000. Calculate the depletion expense from the information given. (Round "Depletion per unit" to two decimal places.)

$288,000

Explanation:

Depletion is an estimated cost of a natural resource that is extracted in each period. This resource is expensed as the extraction is made.

As per given data

Value of mine = $1,400,000 + $400,000 = $1,800,000

Total depletable value = $1,800,000 - $200,000 = $1,600,000

Estimated ore reserves = 1,000,000 tons

Ore mined in first year = 180,000 tons

Depletion expense is based on ratio of the amount of extraction in period to the total expected resource.

Depletion Expenses = Total depletable value  x Ore mined in first year / Total reserve

Depletion Expenses = $1,600,000 x 180,000 tons / 1,000,000 tons = $288,000

$288,000 is Perez company's depleted expense.

Explanation:

The data provided by Perez company is thus evaluated below:

Cost of acquiring the ore mine = $1,400,000.

Additional costs to access the mine = $400,000.

Estimated tons of ore = 1,000,000 tons.

Estimated value of the land after the ore mine is removed = $200,000.

Tons of ore mined and sold in the first year = 180,000 tons.

Analysis:

The first thing required is to ascertain the depletion per ton of ore:

The formula for calculating the Depletion expense per ton is (total cost of the mine less estimated value of the land after the ore mine is removed), divided by the estimated tons of ores that can be extracted Therefore, the Depletion expense per ton = ($1,400,000 + $400,000 - $200,000) / 1,000,000 tons. Depletion expense per ton = $1.60 per ton of ore.

The second thing to do is to ascertain the depletion expense for first year:

The formula for determining this is: Depletion expense = Depletion expense per ton × Number of tons extracted during first year. Therefore, Depletion expense = $1.60 × 180,000 tons

Depletion expense = $288,000.

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