Question

ivanhoe mining company purchased a mine for 65 million which is estimated to have 220,000 of ore and a salvage value of 10 million. in the first year 65,000tons of ore was extracted and sold prepare journal entry for first year for depletion

Answer 1

Answer: To prepare the journal entry for depletion in the first year, we need to calculate the depletion expense based on the units of ore extracted and sold. The formula for depletion expense is:

Depletion Expense = (Cost of the mine - Salvage value) / Total estimated units of ore

Given:

Cost of the mine = $65 million

Salvage value = $10 million

Total estimated units of ore = 220,000 tons

Ore extracted and sold in the first year = 65,000 tons

Step 1: Calculate the depletion expense per ton of ore:

Depletion Expense per ton = ($65 million - $10 million) / 220,000 tons

Depletion Expense per ton = $55 million / 220,000 tons

Depletion Expense per ton = $0.25 per ton

Step 2: Calculate the total depletion expense for the first year:

Depletion Expense = Depletion Expense per ton * Ore extracted and sold in the first year

Depletion Expense = $0.25 per ton * 65,000 tons

Depletion Expense = $16,250

Now, let's prepare the journal entry:

Date: [First Year End Date]

Depletion Expense $16,250

Accumulated Depletion $16,250

The "Depletion Expense" is an expense account, and the "Accumulated Depletion" is a contra-asset account. The journal entry records the depletion expense for the first year and reduces the value of the mine (represented by the "Accumulated Depletion" account) by the same amount. Over time, as more ore is extracted and sold, the depletion expense will be recorded, reducing the value of the mine until it reaches its salvage value.