On July 1, 2007, the Amplex Company purchased a coal mine for $2 million. The estimated capacity of the mine was 800,000 tons. During 2007, the company mines 10,000 tons of coal per month and sells 9,000 tons per month. The selling price is $30 per ton and production costs (excluding depletion and depreciation) are $8 per ton. At the end of the mine’s life, it is expected that it will cost $300,000 to restore the land, after which it can be sold for $100,000. The company also purchased some temporary housing for the miners at a cost of $170,000. The housing has an expected life of 10 years but is expected to be sold for $10,000 at the end of the mine’s life. The company uses the FIFO cost flow assumption.
1. Compute the company’s expenses included on the 2007 income statement.
2. Compute the cost of the company’s inventory at December 31, 2007.
3. In January 2008 a new estimate indicated that the capacity of the mine was only 500,000 tons at that time. Compute the company’s expenses included on the 2008 income statement if the company mines and sells 10,000 tons per month.