For the last 10 years, Am-Mex Coal has used the cost depletion factor of $2500 per 100 tons to write off the investment of $35 million in its Pennsylvania anthracite coal mine. Depletion thus far totals $24.8 million. A new study to appraise mine reserves indicates that no more than 800,000 tons of salable coal remains. Determine next year’s cost and percentage depletion amounts, if estimated gross income is expected to be between $6.125 and $8.50 million on a production level of 72,000 tons.
What will be an ideal response?
Cost depletion: Remaining investment = 35.0 – 24.8 million = $10.2 million
New cost depletion: CDt = 10.2 million/8000 = $1275 per 100 tons
Cost depletion, year 11: 720(1275) = $918,000
Percentage depletion: Rate is 10% of GI for coal; GI range is $6,125,000 to $8,500,000
Percentage depletion, year 11, minimum: 0.1(6,125,000) = $612,500
maximum: 0.1(8,500,000) = $850,000
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