Depletion Changes HiTech Coal Mines has been operating a series of strip mines for nearly 60 years. At the time a coal mine is started, it is impossible to know exactly how much coal will be taken from a mine and the amount of reclamation costs that will be incurred after the mine closes.

However, because these elements, as well as operating costs, are important in the planning process, HiTech periodically reviews each of its mines. One of its larger mines was opened at the beginning of 1997. At the beginning of 2001, potential production and reclamation costs were reviewed. Information relevant to operation of the mine is as follows:

1. The cost of opening the mine in 1997 was $4,000,000. At that time, total production from the mine was expected to be 2,500,000 tons, and the costs of reclamation and closing the mine were estimated at $1,500,000.

2. Production in the first 4 years was 100,000, 300,000, 500,000, and 400,000 tons, respectively.

3. Estimated coal remaining at January 1, 2001, was 1,800,000 tons. Due to new federal regulations, the estimated reclamation and closing costs were increased to

$2,200,000.

4. Production in 2001 was 800,000 tons.

Required:

a. Prepare a report that shows the total amount of depletion costs for each of the first 4 years.

b. Describe how the changes in estimates listed are to be reported and how they will affect 2001 income. Compute total depletion and reclamation costs for 2001.
. The price paid per ton of coal by one of HiTech’s major customers is set on the basis of HiTech’s cost per ton plus a profit of $2.00 per ton. The customer has just learned of the revised estimates by HiTech and is asking for a refund on the basis of being overcharged. What action should HiTech take? Justify your answer.
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