Question

The Oxide Mining Company acquired an iron ore deposit for $2,000,000. The company's geologist estimated the deposit to contain 1,500,000 tons of iron ore. Extracting equipment with a 10-year service life and costing $450,000 was permanently installed in the mine. At the end of the first year, 60,000 tons had been extracted. The end-of-year journal entry to record the depreciation of the extracting equipment would require which of the following? (Assuming the rate of depreciation is proportional to the amount of natural resource removed) a.A credit to Accumulated Depreciation of $45,000 b.A credit to Accumulated Depletion of $90,000 c.A credit to Accumulated Depreciation of $18,000 d.A delay until all of the ore is extracted e.None of the above

Answer 1

a.A credit to Accumulated Depreciation of $45,000

Step-by-step explanation:

Depreciation is the systematic allocation of the cost of an asset to the income statement over the estimated useful life of that asset.

It is determined as the depreciable value of the asset over the estimated useful life of the asset where the depreciable value is the difference between the cost and salvage value of the asset

Mathematically,

Depreciation = (Cost - Salvage value)/Estimated useful life

The entries for recording depreciation are

Debit Depreciation expense

Credit Accumulated depreciation

Depreciation on equipment

= $450,000/10

= $45,000