Question

Kelly Company acquired an iron mine for $2,349,000. Kelly paid a $1,000 filing fee with the county recorder, $50,000 license fee to the state, and $100,000 for a geologic survey. It was estimated that the land would have a value of $400,000 after completion of the mining operations, and that 1,000,000 tons of iron ore could be extracted from the mine. During the first year of operations, 100,000 tons of iron ore were extracted and 80,000 tons of iron ore were sold for $5 per ton. The journal entry to record the current period depletion would include a

A. Debit to Iron Inventory

B. Debit to Depletion Expense

C. Credit to Revenue

D. Debit to Cost of Goods Sold

Answer 1

The journal entry to record the current period depletion for an iron mine would involve debiting Depletion Expense. The depletion charge is calculated by taking all the initial costs and dividing by the total estimated extractable resources after considering salvage value. Therefore the correct answer is B. Debit to Depletion Expense

Step-by-step explanation:

The journal entry to record the current period depletion for Kelly Company's iron mine would include a Debit to Depletion Expense. When calculating depletion expense, all costs incurred to prepare the mine for extraction, such as the purchase price, filing fees, license fees, and geological survey, must be taken into account. This is the total initial cost, which should be reduced by the anticipated salvage value. The remaining balance would represent the depletable cost of the asset.

To calculate the depletion charge per unit, the depletable cost is divided by the estimated total units of the relevant natural resource that can be extracted (in this case, iron ore). For Kelly Company, the calculation would look like this: $2,349,000 (purchase price) + $1,000 (filing fee) + $50,000 (license fee) + $100,000 (geologic survey) - $400,000 (salvage value) = $2,100,000 depletable cost. Dividing this by the estimated extractable tons of 1,000,000 gives a depletion charge of $2.10 per ton.

Considering Kelly Company extracted 100,000 tons during the first year, the depletion for the period would thus be 100,000 tons x $2.10/ton = $210,000. This amount represents the reduction in value of the mine due to the removal of iron ore. Therefore, the journal entry would include a debit of $210,000 to Depletion Expense.