A company purchased land containing mineral deposits for $6,400,000 on January 1, 2021. The company expects to mine 1,600,000 tons of mineral over the next six years. The company has also purchased mining equipment for $800,000. The equipment has an estimated residual value of $160,000 and an expected life of 10 years and can be used at other mining sites. By the end of 2021, the company has mined and sold 240,000 tons. Management calculates depreciation of the equipment to be $96,000 [($800,000 − $160,000) × (240,000 tons/1,600,000 tons)]. Which of the following statements is correct? Multiple Choice Management should depreciate the equipment evenly over six years. Management should not subtract the residual value in calculating depreciation. Management should depreciate the equipment over 10 years. Management’s calculation is correct.
A company purchased land containing mineral deposits for $6,400,000 on January 1, 2021. The company expects to mine 1,600,000 tons of mineral over the next six years. The company has also purchased mining equipment for $800,000. The equipment has an estimated residual value of $160,000 and an expected life of 10 years and can be used at other mining sites. By the end of 2021, the company has mined and sold 240,000 tons. Management calculates depreciation of the equipment to be $96,000 [($800,000 − $160,000) × (240,000 tons/1,600,000 tons)]. Which of the following statements is correct?
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Management should
depreciate the equipment evenly over six years. -
Management should not subtract the residual value in calculating depreciation.
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Management should depreciate the equipment over 10 years.
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Management’s calculation is correct.
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