Question

Binari Mining Company purchased a site containing a mineral deposit during 2019. The purchase price was RM820,000, and the site is estimated to contain 400,000 tons of extractable ore. Binari constructed

a building at the site, at a cost of RM500,000, to be used while the ore is being extracted. When the ore reserves are gone, the building will have no further value.
b. Determine Binari's depletion rate per ton of ore.
c. Prepare the journal entry to record depletion for the year 2019, when Binari mined and sold 150,000 tons of ore.
d. Prepare the journal entry to record depreciation on the building for 2019. Binari calculates depreciation on the building using the units-of-production method based on the amount of ore extracted (150,000 tons

Answer 1

Binari Mining Company's depletion rate per ton is RM2.05, with a 2019 depletion expense recorded as RM307,500. The depreciation expense for the building for 2019, using the units-of-production method, is RM187,500. These calculations are based on the purchase cost of the site, the cost of the building, and the amount of ore extracted.

Step-by-step explanation:

Depletion Rate and Journal Entries for Binari Mining Company

To determine the depletion rate per ton of ore for Binari Mining Company, we divide the cost of acquiring the deposit by the estimated amount of extractable ore. The cost of the deposit is RM820,000 and the total estimated extractable ore is 400,000 tons.

Depletion rate per ton = Total cost of mineral deposit / Estimated extractable ore
Depletion rate per ton = RM820,000 / 400,000 tons = RM2.05 per ton

Now, to prepare the journal entry to record the depletion for 2019:

Depletion Expense RM307,500
Accumulated Depletion RM307,500
(150,000 tons × RM2.05 per ton)

For the depreciation of the building, we use the units-of-production method. As 150,000 tons were extracted in 2019, and the building cost is RM500,000, we first need to calculate the depreciation per ton. We assume that the building's useful life is tied to the ore extracted, which is 400,000 tons.

Depreciation per ton = Building Cost / Estimated extractable ore

Depreciation per ton = RM500,000 / 400,000 tons = RM1.25 per ton

To record the depreciation for the building in 2019:

Depreciation Expense RM187,500
Accumulated Depreciation RM187,500
(150,000 tons × RM1.25 per ton)