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Cleanburn Coal Co. purchased coal-leasing land

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

Before mining could 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 the coal is removed: they have no residual value. Machinery that cost $1,162,500 was installed, but its service life is limited to the time required to remove the coal. The building will depreciated on a straight-line basis, while the machinery will be depreciated by using the sum-of -the -years' digit method.

In the first year of operations, Cleanburn mined 30,000 tons of coal: in the second year, 70,000 tons : and in the third year, 75,000 tons.

How do I prepare a schedule showing
q. unit and total depletion
b. depreciation for the first three years of operation.
Assume that the purchase occurred on Jan. 1 and that Cleanburn uses a calendar fiscal year.

Solution Preview

First, the quantity of recoverable units of the natural resource must be estimated. Then the total cost of the natural resource less any estimated residual value is divided by the estimated number of recoverable units to obtain a cost per unit of output. This cost per unit is multiplied by the number of units extracted during the period to determine the depletion charge.

Therefore, total cost will include
coal-leasing land $21,700,000
Soil test by geologist cost $35,250
test at other sites $116,250
Test permits ...

Solution Summary

This solution is comprised of a detailed explanation to prepare a schedule showing unit and total depletion and depreciation for the first three years of operation.