Question 1

On January 1, Year 1, Mine Co. purchased a mineral mine for $2,000,000 with an estimated 500,000 tons of ore. Mine Co. is legally required to restore the land at the end of the mine's life. The fair value of this Asset Retirement Obligation (ARO) is estimated at $100,000.

In Year 1, Mine Co. extracted 50,000 tons.

What is the depletion expense for Year 1?

Accepted Answer

Depletable Base = Cost + Development Costs + Restoration Costs (ARO) - Residual Value.
Depletion Rate = Base / Estimated Units.
Expense = Rate * Units Extracted.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Expensing the ARO immediately instead of capitalizing; forgetting to include ARO in the base.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 5

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