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

In cost accounting, depletion is accounting to match the cost of acquiring the natural resource with the revenue generated from its extraction and sale.

Depletion Rate = Total Cost of Mineral Rights / Estimated Total Tons of Mineral

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

= $0.639 per ton

Depletion Expense = Depletion Rate × Tons Mined and Sold in the Current Year

= $0.639/ton * 44,234,000 tons

= $28,276,826.86

The adjusting entry on December 31 to recognize the depletion expense is prepared as follows:

Adjusting Entry on December 31:

Dr Depletion Expense (Income Statement) $28,276,827

Cr Accumulated Depletion (Balance Sheet) $28,276,827.