Question

A company acquires a zinc mine at a cost of $750,000. It incurs additional costs of $100,000 to access the mine, which is estimated to hold 200,000 tons of zinc. The estimated value of the land after the zinc is removed is $50,000. 1) Prepare the entry(ies) to record the cost of the zinc mine. 2) Prepare the year-end adjusting entry if 50,000 tons of zinc are mined, but only 40,000 tons are sold the first year. General Journal Debit Credit

Answer 1

1) Zinc mine a/c Dr   $800,000

Land a/c    Dr    $50,000

To Cash a/c $850,000

[ Cost of zinc mine = initial cost incurred + additional cost for accessing - estimated value of land after zinc is removed  

= 750,000 + 100,000 - 50,000

= $800,000 ]

2) Depletion expense a/c   Dr $200,000

To Accumulated Depletion a/c $200,000

[The unit (per ton) depletion charge is $4 (i.e. $800,000 cost / $200,000 capacity).

However only 50,000tonnes were mined this year. Therefore depletion amount will be 50,000 * $4 = $200,000]

Note: The unsold 10,000 tonnes of mined zinc will appear as closing stock in balancesheet.