Question

Perez Company acquires an ore mine at a cost of $1,400,000. It incurs additional costs of $400,000 to access the mine, which is estimated to hold 1,000,000 tons of ore. 180,000 tons of ore are mined and sold the first year. The estimated value of the land after the ore is removed is $200,000. Calculate the depletion expense from the information given. (Do not round your intermediate calculations.)
Cost
Salvage
Amount subject to depletion
Total units of capacity
Depletion per unit (#.##)
Units extracted and sold in period
Depletion expense
1. Prepare the entry to record the cost of the ore mine.
2. Prepare the year-end adjusting entry.

Answer 1

Answer:

1. Journal Entry - See explanation section

2. Adjusting Entry - See explanation section

Explanation:

Before we provide journal entries, we have to calculate the depletion expense according to the questions format.

Cost (Purchase price + additional cost)  $1,800,000

Salvage value                                            $ 200,000

Amount subject to depletion                   $1,600,000

Total units of capacity                                1,000,000

Depletion per unit                                      $1.60

Units extracted and sold in period            180,000

Depletion expense                                    $288,000

Therefore, the journal entry to record the cost of the ore mine.

Debit Ore mine                 $1,800,000

Credit Cash                       $ 1,800,000

Since, the cost of acquisition of a mine ore will be the combination of the cost of an ore mind, both have been added to determine the total cost.

Adjusted entry will be-

Depreciation expense     Debit  288,000

Accumulated depreciation     Debit   288,000