On January 1, 2024, ABC Company purchased natural resources for ₱12,000,000, with a residual value of ₱1,500,000. The company expects the resources to produce 1,200,000 units of product.Compute the depletion expense for the month of January if ABC Company mined and sold 20,000 units.
Question
On January 1, 2024, ABC Company purchased natural resources for ₱12,000,000, with a residual value of ₱1,500,000. The company expects the resources to produce 1,200,000 units of product.Compute the depletion expense for the month of January if ABC Company mined and sold 20,000 units.
Solution
To compute the depletion expense, we first need to calculate the depletion rate per unit. This is done by subtracting the residual value from the total cost and then dividing by the total number of units expected to be produced.
Here are the steps:
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Calculate the total depletable base: Total cost - Residual value = ₱12,000,000 - ₱1,500,000 = ₱10,500,000
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Calculate the depletion rate per unit: Depletable base / Total units = ₱10,500,000 / 1,200,000 units = ₱8.75 per unit
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Calculate the depletion expense for January: Depletion rate per unit * Units mined and sold in January = ₱8.75 * 20,000 units = ₱175,000
So, the depletion expense for the month of January is ₱175,000.
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