The Orser Mining Company acquired a gold mine for $8,000,000. It is estimated that 40,000 ounces of gold can be extracted from the mine. In the first year of operations, 15,000 ounces of gold were extracted. The Orser Mining Company would recognize:
A) depletion expense of $3,000,000.
B) depreciation expense of $3,000,000.
C) an increase in profit of $3,000,000.
D) cost of goods sold of $3,000,000.

Question

Quizplus · Accepted Answer

Depletion expense is the natural resources equivalent of depreciation. It is the allocation of the cost of the natural resource over the period of time in which it is expected to be used. In this case, the cost of the mine is $8,000,000 and the estimated amount of gold that will be extracted is 40,000 ounces. Therefore, the depletion expense per ounce of gold is $200 ($8,000,000 ÷ 40,000 ounces). In the first year of operations, 15,000 ounces of gold were extracted, so the depletion expense would be $3,000,000 ($200 × 15,000 ounces).

The Orser Mining Company Acquired a Gold Mine for $8,000,000