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On July 1, 2020, Blue Spruce Corp. invested $689,920 in a mine estimated to have 784,000 tons of ore of uniform grade. During the last 6 months of 2020, 121,000 tons of ore were mined. Assume that the 100,000 tons of ore were mined, but only 80,000 units were sold. How are the costs applicable to the 20,000 unsold units reported?

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Answer:

Cost applicable to the 20,000 is reported as part of inventory as current asset.

20,000 × 0.88 = $17,600

Explanation:

Investment cost =$689, 920

Estimated capacity = 784,000 tonnes

Therefore, depletion cost per unit ;

Investment cost ÷ Estimated capacity

Depletion cost per unit = $689,920 ÷ 784,000 = $0.88

Assume 100,000 was mined and 80,000 was sold

Cost applicable to the 20,000 is reported as part of inventory as current asset.

20,000 × 0.88 = $17,600

Unit sold = 80,000 × 0.88 = $70,400

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