Question

Perez Company acquires an ore mine at a cost of $1,400,000. It incurs additional costs of $400,000 to access the mine, which is estimated to hold 1,000,000 tons of ore 180,000 tons of ore are mined and sold the first year. The estimated value of the land after the ore is removed is $200,000. Calculate the depletion expense from the information given. 

1. & 2. Prepare the entry to record the cost of the ore mine and year-end adjusting entry. 

Answer 1

1. Depletion expense Calculation

Cost ($ 1,400,000 + 400,000) (it includes additional Costs)	$1,800,000
Salvage value	$200,000
Amount subject to depletion ( Cost - Salvage Value)	$1,600,000
Total units of capacity	1,000,000
Depletion per unit (1,600,000/1,000,000)	$1.60 Per Unit
Units extracted and sold in period	180,000
Depletion expense ($1.60 * 180000)	$288,000

2).

Entry to record the cost of the ore mine and year-end adjusting entry.

Date	accounts & explanation	debit	credit
	Ore Mine	1,800,000
	Cash		1,800,000
	(Cost of Ore Mine with Additional Cost to access the Mine)
	Depletion expense	$288,000
	Accumulated depletion		$288,000
	(Depletion expense as calculated Above)