Question

At the beginning of the current year, Vanity Company purchased a mineral mine for P26,400,000 with removable ore estimated at 1,200,000 tons.

After it has extracted all the ore, the entity will be required by law to restore the land to the original condition at an estimated cost of P2,400,000. The present value of the estimated restoration cost is P1,800,000.

The entity believed that it will be able to sell the property afterwards for P3,000,000. During the current year, the entity incurred P3,600,000 of development costs preparing the mine for production and removed 80,000 tons and sold 60,000 tons of ore.

Prepare journal entries for the current year based on the transactions.

Answer 1

Cost per Ton =	26,400,000 +3,600,000 − 0
1,200,000

Cost per Ton = P25

Total Depletion of Mine
= P 25 × 80000
= P2000000

So the mine will be stated at P 28000000(=26400+3600−2000) in balance sheet but not all of the amount $2000000 will be recorded as depletion expense because the company had 20000ton of coal unsold at the end of the month. Here, the depletion expense will be calculated using the following formula:

Depletion Expense = Total Depletion of Mine − Depletion Related to Unsold Extract

Depletion Expense = P2000000 − P25 × 20000

Depletion Expense = P2000000 − P500000

Depletion Expense = P1950000

Journal

Coal Inventory	50000
Depletion Expense	1950000
Coal Mine Assets		2000000