Exercise 3: Depletion

The Stewart Mining Company operates a copper mine. The company paid $10,000,000 in 2018 for the mining site and spent an additional $1,000,000 to prepare the mine for extraction of the copper.

After extracting the copper, the company is required to restore the land to its original condition. The present value of the restoration costs is $2,000,000. There will be no residual (salvage) value for the copper mine.

The company also purchased new equipment in 2018 for $800,000. After extracting the copper from this mine, the equipment will be sold for an estimated residual amount of $80,000.

Stewart expects to extract 3 million pounds of copper from the mine. In 2018, the company extracted 500,000 pounds and sold 400,000 pounds.

Required: Answer the following, rounding unit calculations to two decimal places.

a. Compute the cost of the mine.

b. Compute the depletion for 2018.

c. Compute depreciation for 2018.

d. What amount of depletion will be included in COGS for 2018?

e. What amount of depletion will be included in the cost of Copper Inventory at the end of 2018?