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In April 2013, Sparkle Enterprises purchased the Crimson Mine at a cost of $18,000,000. The mine is estimated to contain 500,000 tons of ore with a residual value of $2,000,000 after mining operations are completed. During 2013, 120,000 tons of ore were removed from the mine and sold. In this situation:

a. The book value of the mine is $16,000,000 at the end of 2013.
b. The amount of depletion deducted from revenue during 2013 is $3,840,000.
c. The amount of depletion deducted from revenue during 2013 is $2,000,000.
d. The mine is classified as an intangible asset with in indefinite life and is not amortized.

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Answer:

The correct answer is B.

Explanation:

Giving the following information:

In April 2013, Sparkle Enterprises purchased the Crimson Mine for $18,000,000. The mine is estimated to contain 500,000 tons of ore with a residual value of $2,000,000 after mining operations are completed. During 2013, 120,000 tons of ore were removed from the mine and sold.

Annual depreciation= [(original cost - salvage value)/useful life of production in units]*units produced

Annual depreciation= (16,000,000/500,000)*120,000= $3,840,000

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