Question

On April 2, 2017, Montana Mining Co. pays $3,721,000 for an ore deposit containing 1,525,000 tons. The company installs machinery in the mine costing $213,500, with an estimated seven-year life and no salvage value. The machinery will be abandoned when the ore is completely mined. Montana begins mining on May 1, 2017, and mines and sells 166,200 tons of ore during the remaining eight months of 2017. Prepare the December 31, 2017, entries to record both the ore deposit depletion and the mining machinery depreciation. Mining machinery depreciation should be in proportion to the mine’s depletion.

Answer 1

Depletion of natural resources is process of apportioning cost of natural resources to the period when it is utilized. They are shown at cost in balance sheet. Depletion expense per period is dependent on units extracted from mining, cutting and pumping.

The entry is to record depreciation charged on ore deposit depletion. To record this entry, debit depletion charges, and credit accumulated depreciation as shown below:

Compute depletion cost per unit:

The depletion cost per unit is calculated by dividing the net cost of the ore with the total units of capacity as shown below:

Hence, depletion per unit is $2.44.

Compute depletion amount on ore deposit:

The depletion amount on one ore deposit is calculated by multiplying the cost per depletion unit with the number of units utilized as shown below:

Hence, depletion expenses on ore deposit amounts to $405,528.

Pass entry to record depreciation charged on mining machine as follows:

Compute depreciation cost per unit:

The depletion cost per unit is calculated by dividing the net cost of the ore with the total units of capacity as shown below:

Hence, depreciation per unit is $0.14.

Compute depreciation amount on ore deposit:

The depletion amount on one ore deposit is calculated by multiplying the cost per depletion unit with the number of units utilized as shown below:

Hence, depreciation expenses on ore deposit amounts to $23,268.