Question

Recording Entries Related to the Purchase and Depletion of Natural Resources On May, 1, 2020, Star Mines Inc. purchased an ore mine for $1,800,000 to access an estimated 933,000 tons of ore. The company incurred development costs of $135,000 related to the mine and purchased equipment for the mine for $270,000 with a useful life of 8 years. The equipment has no use outside of this mine project. The company is expected to restore the land for alternative uses after mining is complete. The present value of the restoration cost is estimated to be $60,000. The company extracted 108,000 tons of ore in 2020 and sold 90,000 tons. Support a. Record the entry for purchase of the mine and equipment. Assume all purchases were for cash. Account Name Dr. Cr. To record purchase of mine ► To record purchase of mine equipment b. Record the entry for (1) depletion of the ore and (2) cost of sale of ore in 2020. Note: Round the depletion rate to two decimals used in your calculations. Account Name Dr. Cr. To record depletion of ore To record cost of sale of ore C. Record the entry for depreciation of the equipment in 2020 assuming the equipment is depreciated in proportion to the depletion of the mine. Note: Do not round until your final answer. Round your final answer to the nearest whole dollar. Account Name Dr.

Answer 1

a)

	Particulars	Debit	Credit
Record Purchase of mine	Ore Mine A/c	$ 1,990,500
	Cash A/c		$ 1,995,000
Record Purchase of mine equipment	Ore Mine equipment A/c	$ 2,70,000
	Cash A/c		$ 2,70,000

b)

	Particulars	Debit	Credit
Depletion of ore	Inventory	$ 2,31,120
	Accumulated Depletion		$ 2,31,120
Cost of sale of ore in 2020	Cost of goods sold	$ 192,600
	Inventory		$ 192,600

c)

	Particulars	Debit	Credit
Depriciating the equipment	Depreciation A/c	$ 31,254
	Ore mine equipment A/c		$ 31,254

NOTE:-

a) As per AS 10 all costs incurred to make the asset ready for intended use should be capitalised as part of the Asset cost. Thus, the development cost and restoration cost will be added to the purchase cost.

b)Depletion per unit= (Purchase Cost+Development Cost+Restoration Cost)/Estimated iron ore extraction

=(1,800,000+135,000+60,000)/933,000

=2.138

=2.14

c) Depreciation= (Cost of equipment/Estimated Extraction) x Actual Extraction

=(2,70,000/933,000) x 108,000

= 31,254