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Underwood’s Miners recently purchased the rights to a diamond mine. It is estimated that there are two million tons of ore within the mine. Underwood’s paid $46,000,000 for the rights and expects to harvest the ore over the next fifteen years. The following is the expected extraction for the next five years. • Year 1: 50,000 tons • Year 2: 900,000 tons • Year 3: 400,000 tons • Year 4: 210,000 tons • Year 5: 150,000 tons Calculate the depletion expense for the next five years and create the journal entry for year one.

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Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
FindFindarrow_forward

Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 11, Problem 6PB
Textbook Problem
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Underwood’s Miners recently purchased the rights to a diamond mine. It is estimated that there are two million tons of ore within the mine. Underwood’s paid $46,000,000 for the rights and expects to harvest the ore over the next fifteen years. The following is the expected extraction for the next five years.

• Year 1: 50,000 tons

• Year 2: 900,000 tons

• Year 3: 400,000 tons

• Year 4: 210,000 tons

• Year 5: 150,000 tons

Calculate the depletion expense for the next five years and create the journal entry for year one.

To determine

Introduction:

Natural resources are part of the land and extracted from land to convert it into the products. They are accounted as inventory in the books of accounts.

To calculate:

The depletionexpense for next five year and to journalize the entry for year one.

Explanation of Solution

Calculation of the depletion rate:

DepletionRate=PurchaseCostoftheNatural ResourcesEstimatedTotal Output

Substitute $46,000,000 for Purchase Cost of the Natural resources and2,000,000tons of ore for Estimated Total Output in the above formula.

Depletion rate=$46,000,0002,000,000=$23 per tons

Calculation of depletion expense for next five years:

Year Expected Extraction(tons) (A) Depletion Rate ($ per ton) (B) Depletion Amount   

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Chapter 11 Solutions

Principles of Accounting Volume 1
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