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Miller Mining, a calendar-year corporation, purchased the rights to a copper mine on July 1, Year 1. Of the total purchase price, $2.8 million was appropriately allocable to the copper. Estimated reserves were 800,000 tons of copper. Miller expects to extract and sell 10,000 tons of copper per month. Production began immediately. The selling price is $25 per ton. Miller uses percentage depletion (15%) for tax purposes. To aid production, Miller also purchased some new equipment on July 1, Year 1. The equipment cost $76,000 and had an estimated useful life of 8 years. After all the copper is removed from this mine, however, the equipment will be of no use to Miller and will be sold for an estimated $4,000. If sales and production conform to expectations, what is Miller’s depreciation expense on the new equipment for financial accounting purposes for the Year 1 calendar year?

a. $10,800
b. $5,400
c. $9,000
d. $4,500

Respuesta :

Answer:

d. $4,500

Explanation:

The computation of depreciation expense on the new equipment is shown below:-

For computing the depreciation expense on the new equipment first we need to find out the Depreciation per annum which is here below:-

Depreciation per annum = (Cost - Residual value) ÷ Life

= ($76,000 - $4,000) ÷ 8

= $72,000 ÷ 8

= $9,000

Depreciation for 1 year calendar (July 1 to Dec 31) = Depreciation per annum × 6 months ÷ Total number of months in a year

= $9,000 × 6 ÷ 12

= $4,500

So, the depreciation expenses for the year end up-to 31st Dec is $4,500

Miller's depreciation expense on the new equipment for financial accounting purposes for the Year 1 calendar year would be $4,500 if sales and production conform to expectations.

The cost of equipment is given as $76,000 having 8 years of life and salvage value of  $4,000.

The depreciation is calculated when salvage value is deducted from the cost of equipment and then divide the answer with the number of life years.

[tex]\frac{76,000-4,000}{8} \\=9000[/tex]

Now, the annual value of depreciation would be divided by 2 as it was used twice a year that is semi-annually;

[tex]\frac{9000}{2}\\=4500[/tex]

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