Question

On January 1, Year 1, Gemstone Mining Company (GMC) paid $10,500,000 cash to purchase a stone pit estimated to hold 50,000 tons of useable material. GMC extracted 10,000 tons of stone in Year 1. The rights to the surface pit were expected to have a $500,000 salvage value at the end of Year 3. Based on this information, the journal entry necessary to recognize depletion expense for Year 1 is?

Answer 1

Cost of Mining Stone pit = $10,500,000

Salvage value at the end of third year = $500,000

Total expected mining during the life = 50,000 tonnes

Depletion per tonne = (cost - salvage) ÷ total expected mining

= (10,500,000 - 500,000) ÷ 50,000

= $200 per tonne

Stone extracted during the year = 10,000 tonnes

Depletion expense of Year 1 = 10,000 tonnes @ 200 per tonne

= $2,000,000

JOURNAL ENTRY:

Depletion expense A/c Dr. $2,000,000

To Accumulated Depletion- Mining rights $ 2,000,000

(To record depletion expense for Year 1)