Question

Problem 8-34A Accounting for depletion LO 8-7, 8-9

Flannery Company engages in the exploration and development of many types of natural resources. In the last two years, the company has engaged in the following activities:

Jan.	1,		Year		1		Purchased for $215,000 a silver mine estimated to contain 784,000 tons of silver ore.
July	1,		Year		1		Purchased for $1,820,000 cash a tract of land containing timber estimated to yield 2,940,000 board feet of lumber. At the time of purchase, the land had an appraised of $198,000.
Feb.	1,		Year		2		Purchased for $733,000 a gold mine estimated to yield 29,400 tons of gold-veined ore.
Sept.	1,		Year		2		Purchased oil reserves for $710,000. The reserves were estimated to contain 245,000 barrels of oil, of which 21,000 would be unprofitable to pump.

Required
a. Prepare the journal entries to account for the following:

1. (1) The Year 1 purchases.
2. (2) Depletion on the Year 1 purchases, assuming that 73,000 tons of silver were mined and 989,000 board feet of lumber were cut.
3. (3) The Year 2 purchases.
4. (4) Depletion on the four natural resource assets, assuming that 60,000 tons of silver ore, 1,176,000 board feet of lumber, 8,900 tons of gold ore, and 80,000 barrels of oil were extracted.

b. Prepare the portion of the December 31, Year 2, balance sheet that reports natural resources.
c. Assume that in Year 3 the estimates changed to reflect only 60,680 tons of gold ore remaining. Prepare the depletion journal entry in Year 3 to account for the extraction of 42,476 tons of gold ore.

Answer 1

Req a:
Journal entries:
Date	Accounts title and explanations				Debit $	Credit $
Jan 01 Yr 1	Silver mineral rights				215000
	Cash account					215000
July01 Yr1	Timber land				1820000
	Cash account					1820000
Dec31 Yr1	Depletion expenses				20002
	Accumulated depletion-Silver minerals rights					20002
		(73000 tons @ 0.274)
Dec31 Yr1	Depletion expenses				545928
	Accumulated depletion-Timber land					545928
		(989000 Board ft @ 0.552)
Feb01 Yr2	Gold Mineral rights				733000
	Cash account					733000
Sep 01 Yr2	Oil reserves				710000
	Cash account					710000
Dec31 Yr2	Depletion expenses				16440
	Accumulated depletion-Silver minerals rights					16440
			(60000 tons @ 0.274)
	Depletion expenses				649152
	Accumulated depletion-Timber land					649152
			(1176000 Ft @ 0.552)
	Depletion expenses				221895
	Accumulated depletion-Gold minerals rights					221895
			(8900 tons @ 24.932)
	Depletion expenses				253600
	Accumulated depletion-Oil reserves					253600
			(80000 barrels @3.17)
Req b:
Balance Sheet:
Natural resources:
Silver minerals rights			2150000
Less: Accumulated depletion			36442	2113558
	(20002+16440)
Timber Land			1820000
Less: Accumulated depletion			1195080	624920
	(545928+649152)
Gold Mineral rights			733000
less: Accumulated depletion			221895	511105
Oil reserves			710000
Less: Accumulated depletion			253600	456400
TOTAL NATURL RESOURCES				3705983
Req c:
Net Gold Mineral rights available iN beginning of Year-3					511105
Divide: Estimated remaining reserves					60680
Depletion rate per ton					8.423
Multiply: Gold extarcted in Year-3					42476
Depletion expense for Year-3					357775
Journal entry:
Depletion expenses Dr.				357775
Accumulated depletion-Gold Mineral rights					357775