Question

On July 23 of the current year, Dakota Mining Co. pays \(4,715,000 for land estimated to contain 5,125,000 tons of recoverable ore. It installs machinery costing \)410,000 that has a 10-year life and no salvage value and is capable of mining the ore deposit in 8 years. The machinery is paid for on July 25, seven days before mining operations begin. The company removes and sells 480,000 tons of ore during its first five months of operations ending on December 31. Depreciation of the machinery is in proportion to the mine’s depletion as the machinery will be abandoned after the ore is mined.

Required

Prepare entries to record (a) the purchase of the land, (b) the cost and installation of machinery, (c) the first five months’ depletion assuming the land has a net salvage value of zero after the ore is mined, and (d) the first five months’ depreciation on the machinery.

Analysis Component Describe both the similarities and differences in amortization, depletion, and depreciation

Short answer

The journal entries are given below.

Step-by-step solution

Definitions

Amortization: -it is the process of writing off the cost of intangible assets over their estimated useful life.

Depletion: - it is a measure of exhaustion or removal of wasting assets such as mines and minerals. It reduces the available quantity of minerals.

Depreciation: - it is a measure of the fall in book value of tangible assets from their use over their estimated useful life.

Similarities in amortization, depletion, and depreciation

All results in a decrease in the value of assets.

Differences in amortization, depletion, and depreciation

Amortization applies to intangible assets and depletion applies to wasting assets such as mines, ores, etc. whereas depreciation applies to tangible assets.

Journal entries:

1. Entry to record purchase of land
   

   July 23	Land	$4,715,000
   	Cash		$4,715,000
   	Record purchase of land

2. Entry to record cost and installation of machinery
   

   July 25	Machinery	$410,000
   	Cash		$410,000
   	Record purchase of machinery

3. Entry to record depletion
   

   Dec 31	Depletion expense	$4,41,600
   	Accumulated depletion		$4,41,600
   	Record depletion expense

   Note:
   $\begin{array}{rcl}\mathit{d}\mathit{e}\mathit{p}\mathit{l}\mathit{e}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{}\mathit{p}\mathit{e}\mathit{r}\mathbf{}\mathit{u}\mathit{n}\mathit{i}\mathit{t}& \mathbf{=}& \frac{\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{v}\mathbf{a}\mathbf{u}\mathbf{e}}{\mathbf{t}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{u}\mathbf{n}\mathbf{i}\mathbf{t}\mathbf{s}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{c}\mathbf{a}\mathbf{p}\mathbf{a}\mathbf{c}\mathbf{i}\mathbf{t}\mathbf{y}}\\ depletionperunit& =& \frac{\$4,715,000}{5,125,000}=0.92\\ \mathit{d}\mathit{e}\mathit{p}\mathit{l}\mathit{e}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{}\mathit{e}\mathit{x}\mathit{p}\mathit{e}\mathit{n}\mathit{s}\mathit{e}& \mathbf{=}& \mathit{d}\mathit{e}\mathit{p}\mathit{l}\mathit{e}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{}\mathit{p}\mathit{e}\mathit{r}\mathbf{}\mathit{u}\mathit{n}\mathit{i}\mathit{t}\mathbf{\times }\mathit{u}\mathit{n}\mathit{i}\mathit{t}\mathit{s}\mathbf{}\mathit{s}\mathit{o}\mathit{l}\mathit{d}\\ depletionexpense& =& 0.92\times 480,000=\$441,600\end{array}$
   
4. Entry to record depreciation
   

   Dec 31	Depreciation expense	$38,400
   	Accumulated depreciation- machine		$38,000
   	Record depreciation

   
   Note:
   $\begin{array}{rcl}\mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{}\mathit{p}\mathit{e}\mathit{r}\mathbf{}\mathit{u}\mathit{n}\mathit{i}\mathit{t}& \mathbf{=}& \frac{\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{t}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{u}\mathbf{n}\mathbf{i}\mathbf{t}\mathbf{s}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{p}\mathbf{r}\mathbf{o}\mathbf{d}\mathbf{u}\mathbf{c}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{n}}\\ depreciationperunit& =& \frac{\$410,000}{5,125,000}=\$0.08\\ \mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{}\mathit{e}\mathit{x}\mathit{p}\mathit{e}\mathit{n}\mathit{s}\mathit{e}& \mathbf{=}& \mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{n}\mathbf{}\mathit{p}\mathit{e}\mathit{r}\mathbf{}\mathit{u}\mathit{n}\mathit{i}\mathit{t}\mathbf{\times }\mathit{u}\mathit{n}\mathit{i}\mathit{t}\mathit{s}\mathbf{}\mathit{p}\mathit{r}\mathit{o}\mathit{d}\mathit{u}\mathit{c}\mathit{e}\mathit{d}\\ depreciationexpense& =& \$0.08\times 480,000=\$38,400\end{array}$