Question

In 2004, Horton Company purchased a tract of land as a possible future plant site. In January, 2012, valuable sulphur deposits were discovered on adjoining property and Horton Company immediately began explorations on its property. In December, 2012, after incurring $800,000 in exploration costs which were accumulated in an expense account, Horton discovered sulphur deposits appraised at $4,500,000 more than the value of the land. To record the discovery of the deposits, Horton should A) make no entry. B) debit $800,000 to an asset account. C) debit $4,500,000 to an asset account. D) debit $5,300,000 to an asset account.

Answer 1

The correct answer is (b) Debit $800,000 to an asset account

Step-by-step explanation:

Solution

Given that:

Under the principles or rules of Successful Efforts(SE) method, the cost of exploration is capitalized when the exploration is successful or useful.

Now,

The sulphur deposits have been found, hence exploration cost of $800,000 will be debited or deducted to Asset Account.

In conclusion, the accounting entry will be Debit $ 800,000 to Asset Account.