Question

Pittsburg Resources acquired a coal mine for $6,000,000. The company’s survey estimates that 120,000 tons of coal can be extracted from the mine. In the first year of operations, 25,000 tons of coal was extracted, and the coal is considered sold immediately upon extraction.

Required:

1. Calculate depletion for the first year.

2. Discuss the accounting treatment of the depletion calculated in requirement 1.

Answer 1

The answer is given below;

Step-by-step explanation:

1.$6,000,000/120,000=$50*25,000=$1,250,000

2.this method is called units of digits method for depletion.

The accounting treatment shall be;

Depletion Expense Dr.$1,250,000

Accumulated Depletion Cr.$1,250,000

When the asset will retire, the accumulated depletion will be eliminated with corresponding effect to mine