Horngren's Financial & Managerial Accounting, The Financial Chapters (Book & Access Card)
5th Edition
ISBN: 9780134078939
Author: Tracie L. Miller-Nobles, Brenda L. Mattison, Ella Mae Matsumura
Publisher: PEARSON
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Chapter 9, Problem 9.24E
(a)
To determine
Depletion: It refers to the process of proportionately distributing the cost of the extracting natural resources such as coal, mines, and petroleum from the earth to the number of units extracted. The following is the formula to calculate the depletion expense:
To record: the
(b)
To determine
To record: the journal entry for the payment of fees and other costs.
(c)
To determine
To record: the journal entry for the depletion of the first year.
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Vesco Mineral Resources purchased mineral rights to land in the foothills of the Santa Cristo mountains. The cost of the purchase was $9 million. Vesco originally estimated that 200,000 tons of lignite coal was removable. However, further exploration during the second year of operation revealedthat a total of 280,000 tons could be economically removed. If the company sold 20,000 tons in year 1 and 30,000 tons in year 2, what are the depletion charges each year according to the cost depletion method?
On May 1, Star Mines Inc. purchased an ore mine for $7,200,000 to access an estimated 3,732,000 tons of ore. The company also incurred development costs of $540,000 related to the mine and purchased equipment for $1,080,000 with a useful life of 15 years and no salvage value. The equipment has alternative uses outside of this mine project. The company is expected to restore the land after mining is complete. The present value of the restoration cost is estimated to be $240,000. The company extracted 432,000 tons of ore during the year and sold 360,000 tons. Hint: For the purchase of this mine, an Asset Retirement Obligation is credited for the present value of restoration costs.
Requireda. Record the entry for (1) purchase and development costs of the mine and (2) purchase of equipment on May 1. Assume all purchases were for cash.
Required information
[The following information applies to the questions displayed below.]
Last Chance Mine (LCM) purchased a coal deposit for $2,088,450. It estimated it would extract 17,550 tons of coal from
the deposit. LCM mined the coal and sold it, reporting gross receipts of $1.15 million, $4.35 million, and $3.1 million for
years 1 through 3, respectively. During years 1-3, LCM reported net income (loss) from the coal deposit activity in the
amount of ($15,400), $667,500, and $662,500, respectively. In years 1-3, LCM extracted 18,550 tons of coal as follows:
(Leave no answer blank. Enter zero if applicable. Enter your answers in dollars and not in millions of dollars.)
(1) Tons of
Coal
17,550
(2) Basis
$2,088,450
Depletion
(2)/(1) Rate
$119.00
Year 1
2,400
Tons Extracted per Year
Year 2
11,450
Year 3
4,700
c. Using the cost and percentage depletion computations from parts (a) and (b), what is LCM's actual depletion expense for each year?
Depletion
Expense
Year 1
Year 2
$…
Chapter 9 Solutions
Horngren's Financial & Managerial Accounting, The Financial Chapters (Book & Access Card)
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