Question

Caldwell Mining Co. acquired mineral rights for $228,224,000. The mineral deposit is estimated at 356,600,000 tons. During the current year, 44,234,000 tons were mined and sold.

Required:
A. Determine the depletion rate.
B. Determine the amount of depletion expense for the current year.
C. Journalize the adjusting entry on December 31 to recognize the depletion expense. Refer to the Chart of Accounts for exact wording of account titles.

Answer 1

A. To determine the depletion rate, divide the acquisition cost of mineral rights by the estimated amount of mineral deposit.

Depletion Rate = Acquisition Cost / Estimated Mineral Deposit

Depletion Rate = $228,224,000 / 356,600,000 tons

Depletion Rate = $0.64 per ton

B. To determine the amount of depletion expense for the current year, multiply the depletion rate by the number of tons mined and sold.

Depletion Expense = Depletion Rate * Tons Mined and Sold

Depletion Expense = $0.64/ton * 44,234,000 tons

Depletion Expense = $28,314,560

C. The adjusting entry on December 31 to recognize the depletion expense would involve debiting the Depletion Expense account and crediting the Accumulated Depletion account.

Journal Entry:

Date: December 31

Debit: Depletion Expense - $28,314,560

Credit: Accumulated Depletion - $28,314,560

Step-by-step explanation:

- The debit to Depletion Expense recognizes the expense incurred during the current year due to the depletion of mineral resources.

- The credit to Accumulated Depletion indicates the cumulative amount of depletion recognized since the acquisition of mineral rights.

- This adjusting entry is necessary to accurately reflect the reduction in the value of the mineral deposit and the corresponding expense on the company's financial statements at the end of the year.