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    Depletion and Depreciation

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    Problem:

    Cleanburn Coal Company purchased coal-leasing land that contains 800,000 tons of coal for $21,700,000. Soil test by geologists cost $35,250 for the purchased land, but tests at other sites that yielded negative results cost $116,250. Clearburn uses the full-cost method for exploration costs (i.e. the company's total exploration and testing costs are treated as one cost pool for the entire company rather than being associated with any one exploration project). Tests permits were issued by the federal government at a cost of $41,000 to Cleanburn. The estimated salvage value of the purchased land will be $2,325,000 once the coal is removed. The coal is expected to be mined within 10 years.

    Before mining can begin, the company had to remove trees and undergrowth at a cost of #387,500. In addition, storage facilities and a field office were constructed at a total cost of $271,250. These facilities will last an estimated 25 years, but will serve no purpose once coal is removed; i.e. there is no residual value. Machinery that costs $1,162,500 was installed, but service life is limited to the time required to remove the coal. Buildings will be depreciated on a straight-line basis, while machinery will be depreciated by using the sum-of-the years-digit method.

    In the first year of operation, Cleanburn mined 30,000 tons of coal; the second year 70,000 tons; third year 75,000 tons.

    Prepare a schedule showing:

    1. unit and total depletion
    2. depreciation for the first three years of operation.

    Purchases occurred on Jan 1 and Cleanburn uses a calendar fiscal year.

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    Solution Summary

    This solution describes the depletion and depreciation.

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