Question

Everly Corporation acquires a coal mine at a cost of \(400,000. Intangible development costs total \)100,000. After extraction has occurred, Everly must restore the property (estimated fair value of the obligation is \(80,000), after which it can be sold for \)160,000. Everly estimates that 4,000 tons of coal can be extracted. If 700 tons are extracted the first year, prepare the journal entry to record depletion.

Short answer

Answer

Inventory = $73,500

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Depletion

Depletion is defined as a reduction in the quantity of a production factor due to the manufacturing process. Companies generate new products by combining current goods and services. When old items are turned into new products, it is termed a production process.

Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
	Inventory	73,500
	Coal Mine		73,500

Working notes:

Calculating inventory per ton value

$\begin{array}{c}\text{Inventory\hspace{0.17em}per\hspace{0.17em}ton}=\frac{\text{Cost\hspace{0.17em}of\hspace{0.17em}coal\hspace{0.17em}mine}+\text{Development\hspace{0.17em}cost}+\text{Estimated\hspace{0.17em}fair\hspace{0.17em}value}-\text{Sales\hspace{0.17em}value}}{\text{Total\hspace{0.17em}estimated\hspace{0.17em}coal}}\\ =\frac{\$400,000+\$100,000+\$80,000-\$160,000}{4,000}\\ =\$105\text{\hspace{0.17em}per\hspace{0.17em}ton}\end{array}$

Calculating the value of inventory

$\begin{array}{c}\text{Inventory}=\text{Total\hspace{0.17em}coal\hspace{0.17em}extracted}\times \text{Value\hspace{0.17em}per\hspace{0.17em}ton}\\ =700\times \$105\\ =\$73,500\end{array}$