Question

Computing and Recording Depletion Expense In 2016, Eldenburg Mining Company purchased land for $7.200,000 that had a natural resource reserve estimated to be 500,000 tons. Development and road construction costs on the land were 5420,000, and a building was constructed at a cost of $50,000. When the natural resources are completely extracted, the land has an estimated residual value of $1.200,000. In addition, the cost to restore the property to comply with environmental regulations is estimated to be $800,000. Production in 2016 and 2017 was 60,000 tons and 85,000 tons, respectively, a. Compute the depletion charge for 2016 and 2017. (You should include depreciation on the building, if any, as part of the depletion charge) (Do not round the depletion rate.) 20165 0 20175 0 b. Prepare a journal entry to record each year's depletion expense as determined in parta General journal Date Description Debit Credit 000

Answer 1

first let us know the value of the mine :

land purchase price	7,200,000
development costs	420,000
building cost	50,000
restoration cost	800,000
less: residual value of land	(1,200,000)
value of the mine	$7,270,000

annual depletion rate = $7,270,000 / 500,000 tons

=>$14.54 per ton.

a.

2016	$872,400
2017	$1,235,900

working:

for 2016 :

$14.54*60,000 tons

=>$872,400.

for 2017:

$14.54*85,000 tons

=>$1,235,900..

b.

journal entries:

date	description	debit	credit
2016	depletion expense a/c	872,400
	............To Accumulated depletion expense a/c		872,400
2017	depletion expense a/c	1,235,900
	.........To Accumulated depletion expense a/c		1,235,900

alternative journal entries:

in a few cases the following will be the journal entries:

2016	inventory a/c	872,400
	......To resource reserve a/c		872,400
2017	inventory a/c	1,235,900
	.........To resource reserve a/c		1,235,900