Question

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. The estimated value of the land after the ore is removed is $200,000.

1. Prepare the entry(ies) to record the cost of the ore mine.

2. Prepare the year-end adjusting entry if 180,000 tons of ore are mined and sold the first year.

Short answer

1. Ore mine is debited by $1,800,000, and cash is credited by $1,800,000.
2. Depletion and Ore mine inventory is debited by $216,000 and $24,000, and Accumulated depletion is credited by $240,000

Step-by-step solution

Meaning of Depletion

Depletion is a technique or process ofallocating the cost related to extracting the natural resourceto the period when it is consumed.

Entry to record the cost of the ore mine

Date	Particulars	Debit ($)	Credit($)
	Ore mine	1,800,000
	Cash		1,800,000
	(To record cost of ore mine)

Working note:

$\begin{array}{rcl}Total cost& =& cost+additional cost\\ & =& \$1,400,000+\$400,000\\ & =& \$1,800,000\\ & & \end{array}$

Entry for the sale of ore

Date	Particulars	Debit($)	Credit($)
	Depletion Expense—ore Mine	216,000
	Ore inventory (20,000 × $1.2)	24,000
	Accumulated Depletion—ore Mine(200,000 × $1.2).		240,000
	(To record depletion of ore mine)

Working note:

$\begin{array}{rcl}Depletionperunit& =& \frac{\$1,400,000+\$400,000-\$200,000}{1,000,000}\\ & =& \frac{\$1,200,000}{1,000,000}\\ & =& \$1.2\end{array}$

Calculation of depreciation expense

$\begin{array}{rcl}Depletionexpense& =& \$1.2\times 180,000\\ & =& \$216,000\end{array}$