Question

39) Fortune Drilling Company acquires a mineral deposit at a cost of $5,900,000. It incurs additional costs of $600,000 to access the deposit, which is estimated to contain 2,000,000 tons and is expected to take 5 years to extract. What journal entry would be needed to record the expense for the first year assuming 418,000 tons were mined

Answer 1

Answer:

Debit : Depletion Expense $1,358,500

Credit : Accumulated Depletion Expense $1,358,500

Explanation:

Step 1 : Determine the Total Cost of the Mineral Deposit

Total Cost of the Mineral Deposit include the Purchase costs plus any costs incurred directly to acquire an put the mineral deposit in operation as intended by management.

Total Cost of the Mineral Deposit = $5,900,000 + $600,000

                                                        =  $6,500,000

Step 2 : Find the depletion rate

Depletion rate = Total Cost of Mineral deposit ÷ Expected tones to be extracted

                        = $6,500,000 ÷ 2,000,000

                        = $3.25 per tone

Step 3 : Find the expense for the period

Expense for the period = Depletion rate x amount extracted during the period

                                      = $3.25 x 418,000 tons

                                      = $1,358,500

Step 4 : Journalize

Debit : Depletion Expense $1,358,500

Credit : Accumulated Depletion Expense $1,358,500