P11-5 (Depletion and Depreciation—Mining) Khamsah Mining ...



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 Base | |Estimated Yield | |Per | |1ST & 11th Yrs. | |Each of Yrs. 2-10 Incl. |

| | | | |Ton | | | | |

|$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 Mined |1st |Yrs. |6th |Yrs. 7–10|11th |

|Asset |Cost | |Yr. |2–5 |Yr. | |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)

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