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9 December, 17:52

Galt Company acquired a tract of land containing an extractable natural resource. Galt 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 4,000,000 tons, and that the land will have a value of $600,000 after restoration. Relevant cost information follows: Land $6,400,000 Estimated restoration costs 1,200,000.

If Galt maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material?

a. $1.60

b. $1.75

c. $2.00

d. $1.90

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  1. 9 December, 18:09
    0
    b. $ 1.75

    Explanation:

    Computation of depletion per ton

    Cost of land $ 6,400,000

    Restoration costs $ 1,200,000

    Less: Value after restoration $ (600,000)

    Depletion cost basis $ 7,000,000

    Recoverable reserves 4,000,000 tons

    Depletion costs per ton = Depletion cost basis / Recoverable reserves

    $ 7,000,000 / 4,000,000 tons = $ 1.75 per ton

    The depletion costs are after considering the restoration costs of the land, and considering the value after restoration.
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