Question

Perez Company acquires an ore mine at a cost of $1,400,000. It incurs additional costs of $400,000 to access the mine, which is estimated to hold 1,000,000 tons of ore. The estimated value of the land after the ore is removed is $200,000.1. Prepare the entry(ies) to record the cost of the ore mine.2. Prepare the year-end adjusting entry if 180,000 tons of ore are mined and sold the first year.3. Calculate the depletion expense from the information given.

Answer 1

1. Date Account titles and explanation Debit Credit

Ore mine $1,400,000

Cash $1,400,000

(To record ore mine cost)

2. Date Account titles and explanation Debit Credit

Depletion expenses $288,000

Accumulated depletion $288,000

(To record depletion expenses)

3. Particulars Amount

Cost $1,800,000 ($1,400,000+$400,000)

Salvage $200,000

Amount subject to depletion $1,600,000 ($1,800,000 - $200,000)

Total units of capacity 1,000,000

Depletion per unit $1.6 ($1,600,000/1,000,000)

Units extracted & sold in period 180,000

Depletion expense $288,000 (180,000*$1.6)