Acoal company invests $15 million in a mine estimated to have 20 million tons of coal and no salvage value. it is expected that the mine will be in operation for 5 years. in the first year, 1 tons of coal are extracted and sold. what is the depletion expense for the first year? a. $750,000b. $300,000c. $75,000d. cannot be determined from the information provided.

a. $750,000

Explanation:

We can compute the depletion expense by dividing investment by total available capacity of the coal mine. We charge the full investment as there is no salvage value.

Depletion expense = 15 / 20 = $0.75 million per million tons.

Total extracted coal = 1,000,000

so depletion expense for the first year = 1,000,000 * 0.75 = $750,000

We calculated depletion as we would any depreciation and charge it on activity basis which is the amount of coal extracted.

Hope that helps.

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