Question

Horizon Mountain Mining paid $583,100 for the right to extract mineral assets from a 550,000 -ton deposit. In addition to the purchase price, Horizon also paid a $300 fling fee, a $1,600 license fee to the state of Nevada, and $75,000 for a geological survey of the property. Because Horizon 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, Horizon removed and sold 40,000 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. (Record debits first, then credits. Select the explanation on the last line of the journal entry table.)

Answer 1

Journal entries for the purchase, payment of fees, and depletion for Horizon Mountain Mining's minerals were provided, along with calculations for depletion charge per ton based on the costs and the amount extracted.

Step-by-step explanation:

The student is asking for assistance with making journal entries related to the purchase and depletion of mineral rights. Here is how the journal entries should be recorded:

• (a) Purchase of the minerals
  
  Dr Minerals 583,100
  
  Cr Cash 583,100
  
  Explanation: Record the purchase of mineral rights.
• (b) Payment of fees and other costs
  
  Dr Exploration Expense (Filing fee) 300
  
  Dr Exploration Expense (License fee) 1,600
  
  Dr Geological Survey Expense 75,000
  
  Cr Cash 76,900
  
  Explanation: Record the payment of filing and license fees and the cost of the geological survey.
• (c) Depletion for the first year
  
  Dr Depletion Expense 42,564
  
  Cr Accumulated Depletion - Minerals 42,564
  
  Explanation: Record the depletion expense for the year by allocating the cost of the minerals removed based on the units-of-production method.

To calculate the depletion charge per ton, divide the total purchase price and other costs by the total deposit to get the cost per ton. Then, multiply this figure by the number of tons extracted in the first year.

Total cost of mineral rights and related expenses = $583,100 (purchase price) + $300 (filing fee) + $1,600 (license fee) + $75,000 (geological survey) = $660,000

Depletion charge per ton = $660,000 / 550,000 tons = $1.20 per ton

Depletion expense for 40,000 tons = 40,000 tons * $1.20 per ton = $48,000

Therefore, the depletion expense recorded for the first year is $48,000.