24E Journalizing natural resource de... [FREE SOLUTION]

Chapter 9: 24E (page 488)

Journalizing natural resource depletion
Cannon Mountain Mining paid $462,300 for the right to extract mineral assets from a 400,000-ton deposit. In addition to the purchase price, Cannon also paid a $900 filing fee, a $1,800 license fee to the state of Nevada, and $55,000 for a geological survey of the property. Because Cannon purchased the rights to the minerals only and did not purchase the land, it expects the asset to have zero residual value. During the first year, Cannon removed and sold 50,000 tons of the minerals. Make journal entries to record (a) purchase of the minerals (debit Minerals), (b) payment of fees and other costs, and (c) depletion for the first year.

Short Answer

Expert verified

Depletion per ton is$1.30.

Step by step solution

Meaning of Depletion

A technique through which business entities allocate the cost of natural resources over their usage is known as depletion. It is determined using a method known as units of production.

Journal entries for purchase

Date	Accounts and Explanation	Debit $	Credit $
	Minerals	462,300
	Cash		$462,300
	(To record the purchase of mineral mountain)

Journal entries for payment of fees and other costs

Date	Accounts and Explanation	Debit $	Credit $
	Minerals 鈥� Other fees	57,700
	Cash		57,700
	(To record the other fees paid)

Journal entries for Depletion for first year

Date	Accounts and Explanation	Debit $	Credit $
	Depletion expenses 鈥� minerals	65,000
	Accumulated depletion - minerals		65,000
	(To record the depletion expenses of the year)

Working note: Calculation of depletion

$\begin{array}{rcl} D e p l e t i o n e x p e n s e s & = & \frac{C o s t}{E s t i m a t e d e x t r a c t i o n} 脳 E x t r a c t i o n i n y e a r 1 \\ = & \frac{$ 462, 300 + $ 900 + $ 1, 800 + $ 55, 000}{400, 000} 脳 50, 000 \\ = & $ 1.3 脳 50, 000 \\ = & $ 65, 000 \end{array}$ $\begin{matrix} D e p l e t i o n e x p e n s e s = \frac{C o s t}{E s t i m a t e d e x t r a c t i o n} 脳 E x t r a c t i o n i n y e a r 1 \\ = \frac{$ 462, 300 + $ 900 + $ 1, 800 + $ 55, 000}{400, 000} 脳 50, 000 \\ = $ 1.3 脳 50, 000 \end{matrix}$

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Lot	Appraised Value
1	\(144,000
2	96,000
3	240,000

Asset	Acquisition Date	Cost	Estimated Life	Estimated Residual value	Depreciation Method	Monthly Depreciation Expense
Canoes	Nov. 3, 2018	\(4,800	4 Years	\) 0	SL	$100
Land	Dec 1, 2018	85,000			n/a
Building	Dec 1, 2018	35,000	5 Years	5,000	SL	500
Canoes	Dec 2, 2018	7,200	4 Years	0	SL	150
Computer	Mar. 2, 2019	3,600	3 Years	300	DDB
Office Furniture	MAR. 3, 2019	3,000	5 Years	600	SL

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Short Answer

Step by step solution

Meaning of Depletion

Journal entries for purchase

Journal entries for payment of fees and other costs

Journal entries for Depletion for first year

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