P11-5 (Depletion and Depreciation—Mining) Khamsah Mining Company has purchased

a tract of mineral land for $900,000. It is estimated that this tract will yield 120,000 tons
of ore with sufficient mineral content to make mining and processing profitable. It is
further estimated that 6,000 tons of ore will be mined the first and last year and 12,000
tons every year in between. (Assume 11 years of mining operations.) The land will have a
residual value of $30,000. The company builds necessary structures and sheds on the site
at a cost of $36,000. It is estimated that these structures can serve 15 years but, because
they must be dismantled if they are to be moved, they have no salvage value. The
company does not intend to use the buildings elsewhere. Mining machinery installed at
the mine was purchased secondhand at a cost of $60,000. This machinery cost the former
owner $150,000 and was 50% depreciated when purchased. Khamsah Mining estimates
that about half of this machinery will still be useful when the present mineral resources
have been exhausted but that dismantling and removal costs will just about offset its
value at that time. The company does not intend to use the machinery elsewhere. The
remaining machinery will last until about one-half the present estimated mineral ore has
been removed and will then be worthless. Cost is to be allocated equally between these
two classes of machinery. Instructions (a) As chief accountant for the company, you are
to prepare a schedule showing estimated depletion and depreciation costs for each year of
the expected life of the mine. (b) Also compute the depreciation and depletion for the first
year assuming actual production of 5,000 tons. Nothing occurred during the year to cause
the company engineers to change their estimates of either the mineral resources or the life
of the structures and equipment.

(a) Estimated depletion:

Estimated Depletion
Depletion Estimated Yield Per 1ST & 11th Each of Yrs. 2-10
Base Ton Yrs. Incl.
$870,000* 120,000 tons $7.25 $43,500** $87,000***

* ($900,000 – $30,000)
** ($7.25 X 6,000)
*** ($7.25 X 12,000)

Estimated depreciation:

Per ton 1st Yrs. 6th Yrs. 11th

Asset Cost Mined Yr. 2–5 Yr. 7–10 Yr.
Building $36,000 $.30* $1,800 $3,600 $3,600 $3,600 $1,800
Machinery (1/2) 30,000 .25** 1,500 3,000 3,000 3,000 1,500
Machinery (1/2) 30,000 .50*** 3,000 6,000 3,000 0 0

* $36,000 ÷ 120,000 = $.30

** $30,000 ÷ 120,000 = $.25
*** ($30,000 ÷ 120,000) X 2 = $.50

(b) Depletion: $7.25 X 5,000 tons = $36,250

Depreciation: Building $.30 X 5,000 = $1,500

Machinery $.25 X 5,000 = 1,250
Machinery $.50 X 5,000 = 2,500
Total depreciation $5,250

Question # 2 In its 2007 Annual Report Campbell Soup Company reports beginning-of-
the-year total assets of $7,745 million, end-of-the-year total assets of $6,445 million, total
sales of $7,867 million, and net income of $854 million. (a) Compute Campbell's asset
turnover ratio. (Round answer to 3 decimal places,i.e. 5.252.) ? times (b) Compute
Campbell's profit margin on sales. (Round answer to 2 decimal places, i.e. 5.25.) % ? (c)
Compute Campbell's rate of return on assets. (Round answers to 2 decimal places, i.e.
5.25.) % ?

(a) Asset turnover ratio:

$7,867
= 1.109 times
$7,745 + $6,445
2

(b) Profit margin on sales:

$854
= 10.86%
$7,867

(c) Rate of return on assets:

1. 1.109 X 10.86% = 12.04%

 2. $854
= 12.04%
$7,745 + $6,445
2

Question 3 Lockhard Company purchased machinery on January 1, 2010, for $80,000.

The machinery is estimated to have a salvage value of 8,000 after a useful life of 8 years.
(a) Compute 2010 depreciation expense using the double-declining balance method. $ ?
(b) Compute 2010 depreciation expense using the double-declining balance method
assuming the machinery was purchased on October 1, 2010. $ ?

(a) $80,000 X 25%* = $20,000

(b) ($80,000 X 25%) X 3/12 = $5,000

*(1/8 X 2)

Question # 4 Dickinson Inc. owns the following assets. Asset Cost Salvage Estimated
Useful Life A $70,000 $7,000 10 years B 50,000 5,000 5 years C 82,000 4,000 12 years
Compute the composite depreciation rate and the composite life of Dickinson's assets.
(Round answers to 1 decimal place, i.e. 5.2.) Composite depreciation rate % ? Composite
Life ? years

Asset Depreciation Expense

A ($70,000 – $7,000)/10 = $ 6,300
B ($50,000 – $5,000)/5 = 9,000
C ($82,000 – $4,000)/12 = 6,500
$21,800

Composite rate = $21,800/$202,000 = 10.8%

Composite life = $186,000*/$21,800 = 8.5 years

*($63,000 + $45,000 + $78,000)