Question

Whispering Corporation acquires a coal mine at a cost of $444,000. Intangible development costs total $111,000. After extraction has occurred, Whispering must restore the property (estimated fair value of the obligation is $88,800), after which it can be sold for $177,600. Whispering estimates that 4,440 tons of coal can be extracted. If 839 tons are extracted the first year, prepare the journal entry to record depletion.

Answer 1

Debit Depletion Expense $88,095

Credit Accumulated Depreciation for Coal Mine $88,095

Being the record of the depletion expense on the acquired coal Mine.

Step-by-step explanation:

Step 1: Compute the depletion expense for the coal mine for that first year

Formula= (Depreciable Cost/ Total Quantity of Coals) x The Quantity of Extracted Coals

Depreciable Cost= Cost of the Coal Mine - Value that can be salvaged

Cost of Coal Mine = Cost of Acquisition + Intangible Development Costs + Fair Value of Obligation

Cost of Coal Mine = $444,000 + $111,000 + $88,800 = $643,800

Depreciable Cost = $643,800 - $177,600

= $466,200

Depletion Expense based on Formula

= ($643,800/4,440 tons) x 839 tons extracted the first year

= $88,095

Step 2: Prepare the Journal Entry for the Depletion

Debit Depletion Expense $88,095

Credit Accumulated Depreciation for Coal Mine $88,095

Being the record of the depletion expense on the acquired coal Mine.

Please Note:

Depletion Expense is the expense that is usually incurred when utilizing natural resources such as coal and it is usually charged as expense against profit

The Total cost of coal Mine is a sum of all relevant costs including cost of acquisition, fair value of obligation and intangible development costs.