Problem:

In 2005, Sunflower Co. (Sunflower) acquired a gold mine in Eastern Mindanao. Because the mine is located deep in the Mindanao frontier, Sunflower was able to acquire the mine for a low price of 50,000. In 2006, Sunflower constructed a road to the silver mine costing 5 million improvements and other development costs made in 2006 cost 750,000. Because of the improvements to the mine and to the surrounding land, it is estimated that the mine can be sold for 600,000 when mining activities are complete.

During 2007, five buildings were constructed near the mine site to house the mine workers and their families. The total cost of the five buildings was 2 million. Estimated residual value is 200,000. In 2006, geologists estimated that 4 million tons of silver ore could be removed from the mine for refining.

During 2008, the first year of operation only 500,000 tons of silver ore were removed from the mine. However, in 2009, workers mined 1 million tons of silver. During that same year, geologists discovered that the mine contained 3 million tons of silver ore in addition to the original 4 million tons.

Development costs of P1.3 million were able to mine early in 2009 to facilitate the removal of the additional silver. Early in 2009, an additional building was constructed at a cost of 375,000 to house the additional workers needed to excavate the added silver. The building is not expected to have any residual value.

Compute for the depletion and depreciation for 2008 and 2009. Kindly provide solutions.

Below is an example.

In 2008, Philex Mining Corporation (Philex) purchased property with Natural Resources for P28M. The property had a residual value of P5M. However, the company is required to restore the property to its original condition for P2M. Year In 2008, Philex spent P1M for development cost and P3M for a building on the property. Philex does not anticipate that the building will have utility after the natural resources are removed. In 2009, an amount of P1M was spent for additional development on the mine. The tonnage mined and estimated remaining tons for years 2008 to 2010 are as follows: Tons Extracted Tons Remaining 2008 0 10,000,000 2009 3,000,000 7,000,000 2010 3,500,000 2,500,000 ANSWER: No depletion because there is no production. 2009Purchase price 28,000,000 Estimated restoration cost 2.000.000 Development cost - 2008 1,000,000 Development cost-2009 1.000.000 Total cost 32,000,000 Residual value 5.000.000 Depletable cost 27.000.000 Rate in 2009 (27,000,000 7 10,000,000) 2.70 Depletion in 2009 (3,000,000 x 2.70) 8.100.000 2010 Tons extracted in 2010 Tons remaining in 12/31/2010 Total estimated output - 1/1/2010 3,500,000 2,500,000 6.000.000 New rate in 2010 (27,000,000 8,100,000/6,000,000) 3.15 11,025.000 Depletion in 2010 (3,500,000 x 3.15) Summary of Extractions: 3,000,000 x 2.70 = 3,500,000 x 3.15 = 2,500,000 x 3.15 = Total depletion cost = 8,100,000 11,025,000 7.875.000 27,000,000