Question

Perez company acquires an ore mine at a cost of $3,080,000. it incurs additional costs of $862,400 to access the mine, which is estimated to hold 2,200,000 tons of ore. 240,000 tons of ore are mined and sold the first year. the estimated value of the land after the ore is removed is $440,000. calculate the depletion expense from the information given.

Cost
Salvage
Amount Subject to depletion
Total units of capacity
Depletion per unit
Units extracted and sold in period
Depletion Expense
Prepare the entry to record the cos of the one mine and year-end adjusting entry.

Answer 1

To calculate the depletion expense for the ore mine, subtract the salvage value from the sum of the acquisition cost and additional costs, divide by the total estimated ore to get depletion per unit, and then multiply by the tons sold.

Step-by-step explanation:

The student is asking how to calculate the depletion expense for an ore mine that has been acquired by a company, which is a common problem in the field of accounting. To determine the depletion expense, you first need to calculate the depletion per unit, which is the cost minus the salvage value divided by the total units of capacity. Using the information provided:

• Total cost of acquisition: $3,080,000
• Additional costs: $862,400
• Estimated salvage value: $440,000
• Estimated ore reserves: 2,200,000 tons

First, compute the total amount subject to depletion by adding the cost of acquisition and the additional costs, then subtracting the salvage value:

($3,080,000 + $862,400) - $440,000 = $3,502,400 subject to depletion.

Then, calculate the depletion per unit:

$3,502,400 ÷ 2,200,000 tons = $1.59 per ton depletion per unit.

Next, we account for the ore extracted and sold in the first year:

240,000 tons extracted × $1.59 per ton = Depletion expense of $381,600.

The journal entry to record the depletion expense would be:

• Debit Depletion Expense for $381,600
• Credit Accumulated Depletion – Ore Mine for $381,600