WD Mining Company purchased a section of land for $600,00 in 1986 to develop a zinc mine. The mine began operating in 1994. At that time, management estimated that the mine would produce 200,000 tons of quality ore. A total of 100,000 tons of ore was mined and processed from 1994 through December 31,2001. During January 2002, a very promising vein was discovered. The revised estimate of ore still to be mined was 250,000 tons, Estimated salvage value for the mine land was $1000,000, in both 1994 and 2002. Assuming that 10,000 tons f ore was mined in 2002, the computation WD Mining company should use to determine the amount of depletion to record in 2002 would be...

Solution:

Because 50% of the original estimate of quality ore was recovered during the years 1994-2001, recorded depletion must have been $250,000:

[50% x ($600,000 - $100,000 salvage value)]

In 2002, the earlier depletion of $250,000 is deducted from the $600,000 cost along with the $100,00 salvage value. The remaining depletable cost of $250,000 will be allocated over the 250,000 tons believed to remain in the mine. The correct equation to determine the amount of depletion to record in 2002 would be...

$600,000 - $100,000 - $250,000 X 10,000 tons

250,000 tons

Explain why $250,000 is subtracted.