Question

On February 19 of the current year, Quartzite Co. pays \(5,400,000 for land estimated to contain 4 million tons of recoverable ore. It installs machinery costing \)400,000 that has a 16-year life and no salvage value and is capable of mining the ore deposit in 12 years. The machinery is paid for on March 21, eleven days before mining operations begin. The company removes and sells 254,000 tons of ore during its first nine 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 the machinery, (c) the first nine months’ depletion assuming the land has a net salvage value of zero after the ore is mined, and (d) the first nine months’ depreciation on the machinery.

Analysis Component

Describe both the similarities and differences in amortization, depletion, and depreciation.

Short answer

1. Land is debited by $5,400,000 and Cash is credited by $5,400,000.
2. Machinery is debited by $400,000 and Cash is credited by $400,000.
3. Depletion expense is debited by $342,900 and Accumulated depletion is credited by $342,900.
4. Depreciation expense is debited by $25,400 and Accumulated depreciation is credited by $25,400.

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.

Journal entries:

1. Entry to record purchase of land
   

   Date	Particulars	Debit	Credit
   Feb 19	Land	$5,400,000
   	Cash		$5,400,000
   	Record purchase of land

2. Entry to record cost and installation of machinery
   

   Date	Particulars	Debit	Credit
   March 21	Machinery	$400,000
   	Cash		$400,000
   	Record purchase of machinery

3. Entry to record depletion
   

   Date	Particulars	Debit	Credit
   Dec 31	Depletion expense	$342,900
   	Accumulated depletion		$342,900
   	Record depletion expense

   
   Note:
   $\begin{array}{rcl}\mathit{d}\mathit{e}\mathit{p}\mathit{l}\mathit{e}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{}\mathit{p}\mathit{e}\mathit{r}\mathbf{}\mathit{u}\mathit{n}\mathit{i}\mathit{t}& \mathbf{=}& \frac{\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{t}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{u}\mathbf{n}\mathbf{i}\mathbf{t}\mathbf{s}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{c}\mathbf{a}\mathbf{p}\mathbf{a}\mathbf{c}\mathbf{i}\mathbf{t}\mathbf{y}}\\ depletionperunit& =& \frac{\$5,400,000}{4,000,000}=1.35\\ \mathit{d}\mathit{e}\mathit{p}\mathit{l}\mathit{e}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{}\mathit{e}\mathit{x}\mathit{p}\mathit{e}\mathit{n}\mathit{s}\mathit{e}& \mathbf{=}& \mathit{d}\mathit{e}\mathit{p}\mathit{l}\mathit{e}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{}\mathit{p}\mathit{e}\mathit{r}\mathbf{}\mathit{u}\mathit{n}\mathit{i}\mathit{t}\mathbf{\times }\mathit{u}\mathit{n}\mathit{i}\mathit{t}\mathit{s}\mathbf{}\mathit{s}\mathit{o}\mathit{l}\mathit{d}\\ depletionexpense& =& 1.35\times 254,000=\$342,900\end{array}$
   
4. Entry to record depreciation
   

   Date	Particulars	Debit	Credit
   Dec 31	Depreciation expense	$25,400
   	Accumulated depreciation- machine		$25,400
   	Record depreciation

   Note:
   $\begin{array}{rcl}\mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{}\mathit{p}\mathit{e}\mathit{r}\mathbf{}\mathit{u}\mathit{n}\mathit{i}\mathit{t}& \mathbf{=}& \frac{\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{-}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{t}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{u}\mathbf{n}\mathbf{i}\mathbf{t}\mathbf{s}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{p}\mathbf{r}\mathbf{o}\mathbf{d}\mathbf{u}\mathbf{c}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{n}}\\ depreciationperunit& =& \frac{\$400,000}{4,000,000}=\$0.1\\ \mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{}\mathit{e}\mathit{x}\mathit{p}\mathit{e}\mathit{n}\mathit{s}\mathit{e}& \mathbf{=}& \mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{n}\mathbf{}\mathit{p}\mathit{e}\mathit{r}\mathbf{}\mathit{u}\mathit{n}\mathit{i}\mathit{t}\mathbf{\times }\mathit{u}\mathit{n}\mathit{i}\mathit{t}\mathit{s}\mathbf{}\mathit{p}\mathit{r}\mathit{o}\mathit{d}\mathit{u}\mathit{c}\mathit{e}\mathit{d}\\ depreciationexpense& =& \$0.1\times 254,000=\$25,400\end{array}$
   

Similarities and Differences in amortization, depletion, and depreciation

	Amortization	Depletion	Depreciation
Similarities	Decreases the value of assets.	Decreases the value of assets.	Decreases the value of assets.
Differences	Applies to intangible assets.	Applies to wasting assets.	Applies to tangible assets.