Question

The Consolidated Mining Company bought the Lowly Coal Mine for $11,600,000 with a residual value of $1,600,000. The company believes Lowly Mine will yield 200,000 tons of coal over the life ot O00 002e 6am69 26/1 qinenenhs9 ma98 sonoa the mine. THIS year, Lowly hasmiped 75,000 tons of coal, sdheled sg ginsqo annO 15 a.c00-0er o og optheA What is the RATE of depletion for the Lowly Coal Mine? 8 PTS 6EIAo led Tei opledlstigeo4 qo 1iert ho 3newolle fanstnr to 8onewollsyielea s eleg me9 sliw 000.82 aMoITAJUA A WOH2 TaUM UOY ep anno to yonewdia s 0e pits pnnerta eeol ot ttog viorT 000,2 bsy onled latigeiart of bebbs ed ot smoont teM ert to enerda a'nonthsq HOA3 isdWA eldot a the CALCULATIONS 4 PTS B) What amount of depletion will be recorded for this year? SHOW C) SHOW the required JOURNAL ENTRY to record the depletion. 5 PTS D) Calculate the BOOK VALUE to be shown on the Consolidated Mining Company Balance S after the effect of the journal entry in part (A) above. SHOW YOUR WORK to find Book Value. 6 E) What is the dollar effect on the current assets of Consolidated Mining Co.?1 pt. Increase by $ Decrease by $ NO EFFECT F) What is the dollar effect on the long term assets of Consolidated Mining Co. ? 1 pt. Increase by $ Decrease by $ NO EFFECT

Answer 1

A) RATE of depletion = (Cost of the Mine - Residual Value) / Estimated tons of extraction over Mine's life. Cost of the Mine Residual Value Cost of the Mine - Residual Value Estimated tons of extraction over Mine's life RATE of depletion per ton extracted $11,600,000 $1,600,000 $10,000,000 ($11600000 - $1600000] 200,000 $50 ($10000000 / 200000] B) RATE of depletion per ton extracted Quantum of tons extracted during the year Amount of depletion to be recorded for the year $50 (As calculated in Part-(A)] 75,000 $3,750,000 (75000 x $50] Credit [Ref: Part-(B)] Accounts Debit Depletion Expense $3,750,000 Accumulated Depletion (To record depletion expense for the year) $3,750,000 D) Cost of the Mine Less: Depletion Expense recorded till the year BOOK VALUE of the Mine at the end of the year $11,600,000 $3,750,000 (Ref: Part-(B)] $7,850,000

E) NO EFFECT on current assets because Cost of the Mine is a long-term asset and when depletion expense is recorded, long-term asset will be decreased by the amount of depletion expense and firm's retained earnings will also be decreased by same amount. F) Long-term assets DECREASE BY $3,750,000 because Cost of the Mine is a long-term asset and when depletion expense is recorded, long-term asset will be decreased by the amount of depletion expense and firm's retained earnings will also be decreased by same amount.