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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Depletion entries

Alaska Mining Co. acquired mineral rights for $67,500,000. The mineral deposit is estimated at 30,000,000 tons. During the current year, 4,000,000 tons were mined and sold.

a. Determine the amount of depletion expense for the current year.

b. Journalize the adjusting entry on December 31 to recognize the depletion expense.

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:

Depletion Cost per Unit = Cost of the asset  Residual valueEstimated Number of Units

Depletion Expense=(Depletion Cost per Unit × Number of units Extracted and Sold)

To determine: the amount of the depletion expense for the current year.

Explanation

Determinethe amount of the depletion expense for the current year.

Depletion rate =$2.25 per ton (1)

Number of tones mined and sold =4,000,000 tons

Depletion Expense = (Depletion rate×Number of tonsmined and sold)=$2.25per ton×4,000,000tons=$9,000,000

Working note:

Determine the depletion rate

b.

To determine

To journalize: the adjusting entry on December 31 to recognize the depletion expense.

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