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Compute depletion and depreciation on the mining equipment

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Reference no: EM131810110

Assignment

Question 1

On January 2, 2016 the Jackson Company Purchased equipment to be used in its manufacturing process. The equipment has an estimated life of eight years and an estimated residual value of $30,625. The expenditures made to acquire the asset were as follows:

Purchase price $154,000

Freight Charges $2,000
Installation Charges $4,000

Jacksons policy is to use the DDB(Double Declining -Balance method of depreciation in the early years of the equipment life and then switch to straight line halfway through the equipment life

1. Calculate depreciation for each year of the assets eight year life.
2. Discuss the accounting treatment of the depreciation on the equipment.

Questions 2

Jackpot Mining Company operates a copper mmine in ventral Montana. The Company paid $1,000,000 in 2016 for the mining site and spent an additional $600,000 to prepare the mine for extraction of copper. After the copper is extracted in approxiametly four year, the company is required to restore the land to its original condition, including repaving of roads and replacing a greenbelt. The company has provided the following three cash flow possibilities for the restoration costs.

     Cash outflow     Probabality
1      $300,000           25%
2      $400,000           40%
3      $600,000           35%

To aid extraction, Jackpot purchased some new equipment on July 1, 2016 for $120,000. After the copper is removed from the mine, the equipment will be sold for an estimated residual amount of $20,000. There will be no residual value for the copper mine. The credit-adjusted risk free rate of interest is 10%. The company expects to extract 10 Million pounds of copper from the mine. Actual production was 1.6 Million pounds in 2016 and 3 Million pounds in 2017

1. Compute depletion and depreciation on the mine and mining equipment for 2016 & 2017. The Units of production method is used to calculate depreciation.

2. Discuss the accounting treatment of the depletion on the mine and mine equipment.

Question 3

Alteran Corporation purchased office equipment for $1.5 Million in 2013. The Equipment is being depreciated over a 10-year life using the sum of the year's digit method. The residual value is expected to be $300,000. At the beginning of 2016, Alteran decided to change to straight line depreciation method for this equipment.

1. Prepare the 2016 Depreciation Entry.

Reference no: EM131810110

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