Question

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

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 – 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 – minerals	65,000
	Accumulated depletion - minerals		65,000
	(To record the depletion expenses of the year)

Working note: Calculation of depletion

$\begin{array}{rcl}Depletionexpenses& =& \frac{Cost}{Estimatedextraction}\times Extractioninyear1\\ & =& \frac{\$462,300+\$900+\$1,800+\$55,000}{400,000}\times 50,000\\ & =& \$1.3\times 50,000\\ & =& \$65,000\\ & & \end{array}$$\begin{array}{c}Depletionexpenses=\frac{Cost}{Estimatedextraction}\times Extractioninyear1\\ =\frac{\$462,300+\$900+\$1,800+\$55,000}{400,000}\times 50,000\\ =\$1.3\times 50,000\end{array}$