ExpertMedium1 markMultiple Choice
CPA · Question 23 · Area II: Balance Sheet Accounts
On January 1, Year 1, Mine Co. purchased a mineral mine for $2,000,000 with an estimated 500,000 tons of ore. Mine Co. is legally required to restore the land at the end of the mine's life. The fair value of this Asset Retirement Obligation (ARO) is estimated at $100,000. <br/><br/>In Year 1, Mine Co. extracted 50,000 tons. <br/><br/>What is the depletion expense for Year 1?
On January 1, Year 1, Mine Co. purchased a mineral mine for $2,000,000 with an estimated 500,000 tons of ore. Mine Co. is legally required to restore the land at the end of the mine's life. The fair value of this Asset Retirement Obligation (ARO) is estimated at $100,000. <br/><br/>In Year 1, Mine Co. extracted 50,000 tons. <br/><br/>What is the depletion expense for Year 1?
Answer options:
A.
$200,000
B.
$202,000
C.
$210,000
D.
$190,000
How to approach this question
Depletable Base = Cost + Development Costs + Restoration Costs (ARO) - Residual Value. <br/>Depletion Rate = Base / Estimated Units. <br/>Expense = Rate * Units Extracted.
Full Answer
C.$210,000✓ Correct
C
1. **Depletable Base:** Cost ($2,000,000) + ARO Capitalized ($100,000) = $2,100,000.<br/>2. **Rate:** $2,100,000 / 500,000 tons = $4.20 per ton.<br/>3. **Expense:** 50,000 tons * $4.20 = $210,000.
Common mistakes
Expensing the ARO immediately instead of capitalizing; forgetting to include ARO in the base.
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