Question

Fortune Drilling Company acquires a mineral deposit at a cost of $5,900,000. It incurs additional costs of $600,000 to access the deposit, which is estimated to contain 2,000,000 tons and is expected to take 5 years to extract.Compute the depletion expense for the first year assuming 418,000 tons were mined.a. $1,233,100.b. $1,358,500.c. $1,300,000.d. $1,180,000.e. $1,280,000.

Answer 1

Answer: B - $1,358,500

Explanation: Total costs = $5,900,000+ $600,000= $6,500,000

total estimated deposits = 2,000,000

Estimated annual cost = 6,500,000/2,000,000= 3.25

if 418,000 tons were mine in the first year, it will cost Fortune Drilling Company =3.25*418,000= $1,358,500.