CHAPTER 18

Problem 18-1

Problem 18-2

1.
2.
3.
4.
5.

1.
2.
3.
4.
5.

D
A
A
C
A

B
C
C
C
D

Problem 18-3
1. Ore property
5,000,000

Total cost (960,000 + 490,000)

1,450,000
Less: Accumulated depletion
400,000
Depletable cost
1,050,000
Divide by estimated remaining output (2,400,000
1,000,000)
1,400,000
Revised depletion rate per ton
.75

Cash
5,000,000

2010

2. Ore property

Rock and gravel property

500,000
Cash

3,000,000

500,000

Cash
3,000,000

Depletion (700,000 x .44)

308,000
Accumulated depletion
308,000

4,000,000

Total cost

3. Machinery
4,000,000
Cash

1,450,000
Add: Additional development cost
500,000 Total

4. Depletion
1,140,000
Accumulated depreciation
1,140,000

1,950,000
Less: Accumulated depletion (400,000 + 450,000)
850,000 Remaining
depletable cost
1,100,000
Divide by new estimated remaining output
2,500,000
New depletion rate
.44

8,000,000 400,000 = 7,600,000

7,600,000 / 2,000,000 = 3.80
300,000 x 3.80
= 1,140,000
5. Depreciation
600,000
Accumulated depreciation
600,000

Problem 18-5
4,000,000 / 2,000,000 = 2.00
300,000 x 2.00
= 600,000
2008
Problem 18-4
2008

Rock and gravel property

960,000
Cash

3,960,000
Building
960,000

Depletion (1,000,000 x .40)

400,000
Accumulated depletion
400,000
2009

Resource property
3,960,000
Cash

960,000
Equipment
1,240,000
Cash
2,200,000
Depletion (12,000 x 32)
384,000
Accumulated depletion
384,000

Rock and gravel property

490,000
Cash
490,000
Depletion (600,000 x .75)
450,000
Accumulated depletion
450,000

Cost of resource property

3,960,000
Residual value
120,000 Depletable cost
3,840,000
Divide by estimated output
120,000

Less:

Depletion rate per

unit
32

Accumulated depletion
1,560,000
Depreciation (12,000 x 8)
96,000
Accumulated
depreciation
96,000

Depreciation (600,000 x 4)
2,400,000
Accumulated depreciation
2,400,000

building

960,000
Depreciation rate per unit = ---------------- = 8
120,000

2010

The output method is used in computing the

depreciation of the building
because the life
of the resource property (5 years or 120,000 / 24,000) is
shorter than the life of the building
(8 years).

Depletion (400,000 x 1.60)

640,000
Accumulated depletion
640,000
Depletable cost
5,200,000
Less: 2009 depletion
1,560,000
Balance (3,640,000 / 2,275,000 = 1.60)
3,640,000
Mine improvements
770,000
Cash

Depreciation
310,000
Accumulated depreciation
310,000
(1,240,000 / 4 years = 310,000)

770,000

The straight line method is used for the heavy

equipment because the life of
4 years is shorter
than the life of the resource property of 5 years.
2009

Depletion
800,000
Accumulated depletion (25,000
800,000
Depreciation (25,000 x 8)
200,000
Accumulated
depreciation
200,000

32)

Depreciation (400,000 x 2.80)

1,120,000
Accumulated depreciation
1,120,000
Cost (8,000,000 + 770,000)
8,770,000
Less: Accumulated depreciation
2,400,000
Book value (6,370,000 / 2,275,000 = 2.80)
6,370,000

building
Problem 18-7

Depreciation
310,000
Accumulated depreciation
310,000

Depletion rate

equipment

(5,000,000 / 1,000,000)
5.00
Depreciation rate (8,000,000 / 1,000,000)
8.00

Problem 18-6
First year
Depletion
2008

Ore property

(200,000 x 5)

1,000,000
Depreciation (200,000 x 8)
1,600,000

5,400,000
Cash
5,400,000

Second year
Depletion

Ore property
450,000
Estimated liability for restoration
450,000
Mine improvements
8,000,000
Cash

cost

(250,000 x 5)

1,250,000
Depreciation (250,000 x 8)
2,000,000
Third year
Depletion
none

8,000,000

Depreciation (Schedule A)
550,000

2009

Depletion (600,000 x 2.60)

1,560,000

Schedule A Computation of depreciation for third

year

Problem 18-9
Cost of equipment

1. Cash (50,000 x 110)

8,000,000
Less: Accumulated depreciation
3,600,000
Book value
beginning of third year
4,400,000
Divide by remaining useful life
in years (10 2)
8
Depreciation for third year
550,000

5,500,000
Share capital (50,000 x 100)
5,000,000
Share premium
500,000
2. Resource property
3,000,000
Cash

Fourth year

3,000,000

Depletion (100,000 x 5)

3. Mining equipment
500,000

800,000

Depreciation (Schedule B)

Cash
700,000

800,000

Schedule B Computation of depreciation for fourth

4. Cash (85,000 x 50)

year

4,250,000
Sales
Cost of equipment

4,250,000

8,000,000
Less: Accumulated depreciation
4,150,000
Book value beginning of fourth year
3,850,000
Original estimate of resource deposits
1,000,000 tons
Less: Extracted in first and second years
450,000
Remaining output
550,000 tons
Depreciation rate per unit (3,850,000 / 550,000)
7.00
Depreciation for third year (100,000 x 7)
700,000
Problem 18-8

5. Mining and other direct cost

2,268,000
Administrative expenses
500,000
Cash
2,768,000
6. Depletion
270,000
Accumulated depletion (3,000,000 / 1,000,000 x
90,000)
270,000
7. Depreciation (90,000 x .80)
Accumulated

72,000
depreciation

- mining
72,000

equipment

Depreciation rate (800,000 / 1,000,000) = .80

1. Retained earnings
1,500,000
Accumulated depletion

8. Inventory, December 31 (5,000 x 29)

145,000
Profit and loss

2,500,000

145,000

Total
4,000,000
Less: Capital liquidated
1,800,000
Depletion in ending inventory (5,000 x 20)
100,000
1,900,000
Maximum dividend
2,100,000

Mining labor and other direct costs

2,268,000
Depletion
270,000
Depreciation
72,000
Total production costs incurred
2,610,000
Divide by number of units extracted
90,000
Unit cost
29

2. Retained earnings
1,800,000
Capital liquidated
200,000
Dividends payable
2,000,000

Maximum dividend
1,540,000

Multinational Company
Income Statement
Year ended December 31, 2008

Retained earnings
1,285,000
Capital liquidated
255,000
Dividends payable

Sales
4,250,000
Cost of sales
Mining labor and other direct costs
2,268,000
Depletion
270,000
Depreciation
72,000
Total production cost
2,610,000
Less: Inventory, December 31
145,000
2,465,000
Gross income

1,540,000

Problem 18-10
1,785,000

1. Purchase price

Administrative expenses

50,000
500,000

Net income
1,285,000
Multinational Company
Statement of Financial Position
December 31, 2008
Assets
Current assets:
Cash
3,182,000
Inventory
145,000
Noncurrent assets:
Resource property
3,000,000
Less: Accumulated depletion
270,000
2,730,000
Mining equipment
800,000
Less: Accumulated depreciation
72,000
728,000
3,458,000
Total assets

3,327,000

Road construction
5,000,000
Improvements and development costs
750,000
Total cost
5,800,000
Residual value
( 600,000)
Depletable cost
5,200,000
Depletion rate per unit (5,200,000 / 4,000,000)
1.30
Depletion for 2008 (500,000 x 1.30)
650,000
Depletable cost
5,200,000
Depletion in 2008
( 650,000)
Remaining depletable cost
4,550,000
Development costs in 2009
1,300,000

6,785,000

Total depletable cost 1/1/2009

5,850,000

Equity
Share capital

Original estimated tons

5,000,000

Share premium

4,000,000
Additional estimate

500,000
Retained earnings

3,000,000
Total estimated tons

1,285,000
Total equity

7,000,000
Extracted in 2008

6,785,000

( 500,000)
Remaining tons 1/1/2009

Retained earnings

6,500,000
1,285,000

Add: Accumulated depletion

270,000

New depletion rate per unit (5,850,000 / 6,500,000)

.90

Total
1,555,000
Less: Unrealized depletion in ending inventory (5,000 x 3)
15,000

Depletion for 2009 (1,000,000 x .90)

900,000

2. Cost of buildings
2,000,000

New rate in 2010 (27,000,000 8,100,000/6,000,000)

3.15

Residual value
( 200,000)

Depletion in 2010 (3,500,000 x 3.15)

11,025,000

Depreciable cost
1,800,000
Depreciation rate per unit (1,800,000 / 4,000,000)
.45

Problem 18-12 Answer B

Acquisition cost

Depreciation for 2008 (500,000 x .45)

225,000

26,400,000
Development cost
3,600,000

In the absence of any statement to the contrary, the output

method is used in computing depreciation of mining
equipment.

Estimated restoration cost

Depreciable cost

Less: Residual value

1,800,000
Total cost
31,800,000

1,800,000
Depreciation for 2008

3,000,000
Depletable cost

( 225,000)

28,800,000

Remaining depreciable cost

1,575,000

Rate per unit (28,800,000 / 1,200,000)

Additional building in 2009

24
375,000

Total depreciable cost 1/1/2009

1,950,000

Depletion for 2008 (60,000 x 24)

1,440,000

New depreciation rate per unit (1,950,000 / 6,500,000)

.30
Problem 18-13 Answer C
Depreciation for 2009 (1,000,000 x .30)
300,000

Depletion rate per unit (9,200,000 / 4,000,000)

2.30
Problem 18-14 Answer C

Problem 18-11

Rate per unit (46,800,000 3,600,000 / 2,160,000)

20

2008

No depletion because there is no production.

2009

Purchase price

Depletion in cost of goods sold (240,000 x 20)

4,800,000
28,000,000

Estimated restoration cost

2,000,000
Development cost 2008
1,000,000

Problem 18-15 Answer D

1,000,000

Acquisition cost

Development cost 2009

Total cost

10,000,000
32,000,000

Less: Residual value

Residual value

3,000,000
( 5,000,000)

Depletable cost

Depletable cost
27,000,000
Rate in 2009 (27,000,000 / 10,000,000)
2.70

7,000,000
Less: Accumulated depletion 12/31/2007
(7,000,000 / 10,000,000 = .70 x 4,000,000)
2,800,000
Remaining depletable cost 1/1/2008
4,200,000

Depletion in 2009 (3,000,000 x 2.70)

8,100,000
2010

New depletion rate (4,200,000 / 7,500,000)

Tons extracted in 2010

3,500,000
Tons remaining in 12/31/2010
2,500,000
Total estimated output 1/1/2010
6,000,000

.56
Depletion for 2008 (1,500,000 x .56)
840,000
Problem 18-16 Answer B
Depletable cost

Problem 18-18 Answer C

33,000,000
Depletion for 2007 (33,000,000 / 4,000,000 = 8.25 x 200,000)
( 1,650,000)
Balance 1/1/2008
31,350,000

Purchase price
9,000,000
Development costs in 2007
300,000
Total cost

Production in 2008

9,300,000
225,000

Residual value

New estimate 12/31/2008

1,200,000
5,000,000

Depletable cost

New estimate 1/1/2008

8,100,000
5,225,000
Rate in 2007 (8,100,000 / 2,000,000)

Depletion for 2008 (31,350,000 / 5,225,000 = 6 x 225,000)

1,350,000

4.05
Depletion for 2007 (200,000 x 4.05)
810,000

Problem 18-17
Depletable cost
Question 1 Answer A

8,100,000
Depletion in 2007

Purchase price

( 810,000)
14,000,000

Balance

Less: Residual value

7,290,000
2,000,000

Development costs in 2008

Depletable cost

135,000
12,000,000

Depletable cost in 2008

7,425,000

Depletion rate (12,000,000 / 1,500,000)

8.00

Rate in 2008 (7,425,000 / 1,650,000)

4.50

Depletion for 2008 (150,000 x 8)

1,200,000

Depletion for 2008 (300,000 x 4.50)

1,350,000

Production (25,000 x 6)
150,000
Question 2 Answer C
Production from July 1 to December 31, 2008 (25,000 x 6)
150,000 tons
Annual production (25,000 x 12)
300,000 tons
Estimated life of mine (1,500,000 / 300,000)
5 years
Since the life of the mine is shorter than the life of the
equipment, the output method is used in computing
depreciation.

Equipment
8,000,000
Less: Residual value
500,000
Depreciable cost
7,500,000
Rate per unit (7,500,000 / 1,500,000)
5.00
Depreciation for 2008 (150,000 x 5)
750,000