Joseph Company acquired a tract of land containing an extractable natural resource. Joseph is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 2,500,000 tons and that the extraction will be completed in five years. Relevant cost information follows:

What should be the depletion charge per ton of extracted material?
A) $4.00
B) $4.37
C) $3.97
D) $3.60

Question

Joseph Company acquired a tract of land containing an extractable natural resource. Joseph is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 2,500,000 tons and that the extraction will be completed in five years. Relevant cost information follows:

What should be the depletion charge per ton of extracted material?

What should be the depletion charge per ton of extracted material?
A) $4.00 
B) $4.37 
C) $3.97 
D) $3.60

Quizplus · Accepted Answer

Depletion charge per ton of extracted material can be calculated as follows:

Total cost to be recovered / Total recoverable units

Total cost to be recovered = Cost of land + Cost of restoration = $3,500,000 + $1,500,000 = $5,000,000

Total recoverable units = Recoverable reserve = 2,500,000 tons

Depletion charge per ton of extracted material = $5,000,000 / 2,500,000 tons = $2.00 per ton

However, since the restoration cost is also required to be included, the depletion charge per ton of extracted material would be:

($5,000,000 / 2,500,000 tons) + ($1,500,000 / 2,500,000 tons) = $4.00 + $0.37 = $4.37 per ton.

Therefore, the correct answer is B) $4.37.

Joseph Company Acquired a Tract of Land Containing an Extractable