Zvinakis Mining Company paid 300000 for the rights to mine l

Zvinakis Mining Company paid $300,000 for the rights to mine lead in southeast Missouri. The cost to drill and erect a mine shaft was $2,500,000, and equipment to process the lead ore before shipment to the smelter was $2,010,000. The mine is expected to yield 2,000,000 tons of ore during the five years it is expected to be operating. The equipment has an estimated residual value of $160,000 when mining is concluded. The mine started operations on April 30, 2018. In 2018, 400,000 tons of ore were extracted, and in 2019, 800,000 tons were mined. Required: 1. Compute the depletion rate and the units-of-production depreciation rate. 2. Compute depletion and depreciation for 2018 and 2019.

Solution

Answer:

1. Compute the depletion rate and the units-of-production depreciation rate.

Mineral Right

300,000

Add

Mineral Shaft

2,500,000

Deplition base

2,800,000

Divided by

Recoverable Ore (tons)

2,000,000

Depletion rate per tone

1.4

Mining Equipment

2,010,000

Less: Residual value

160,000

Depreciable base

1,850,000

Divided by

Recoverable Ore (tons)

2,000,000

Depreciation rate per tone

0.925

2. Compute depletion and depreciation for 2018 and 2019.

Depletion for 2018 and 2019

2018 (400,000*1.4)

560000

2019(800,000*1.4)

1120000

Depreciation for 2018 and 2019

2018(400,000*0.925)

370000

2019(800,000*0.925)

740000