Question

Barton Corporation acquires a coal mine at a cost of $1,500,000. Intangible development costs total $360,000. After extraction has occurred, Barton must restore the property (estimated fair value of the obligation is $180,000), after which it can be sold for $510,000. Barton estimates that 5,000 tons of coal can be extracted. If 900 tons are extracted the first year, which of the following would be included in the journal entry to record depletion? a. Debit to Accumulated Depletion for $275,400 b. Debit to Inventory for $275,400 c. Credit to Inventory for $270,000 d. Credit to Accumulated Depletion for $459,000

Answer 1

Answer:

The answer is b. Debit to Inventory for $275,400.

Explanation:

We have Depletion base is calculated as:

Acquisition cost + Development cost + Restoration cost - Disposal price = 1,500,000 + 360,000 + 180,000 - 510,000 = $1,530,000

=> Depletion rate per one ton of extracted coal = 1,530,000/5,000 = $306

Amount of Depletion recorded in first year with 900 tons extracted = 306 x 900 = $275,400; which will be recorded in the first year as:

Dr Inventory - coal extracted              275,400

Cr Accumulated Depletion                275,400

=> Thus, (b) Debit to Inventory for $275,400 is the correct choice.