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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem

Depletion Rate

Oxford Quarries purchased 45 acres of land for $185,000. The land contained stone that Oxford will remove from the ground, finish, and then sell as facing material for buildings. Oxford spent $435,000 preparing the quarry for operation. Oxford estimates that the quarry contains 55,000 tons of usable stone and that it will require 6 years to remove all the usable stone once quarrying begins. Upon completion of quarrying, Oxford estimates that the land will have a residual value of $11,150. During 2019, Oxford extracted 8,500 tons of stone.

Required:

1. Compute the depletion rate per ton.

2. Prepare the journal entry to record the extraction of the stone.

To determine

Concept introduction:

Depletion:

When natural resources such as coal, iron ore, oil reserves and mineral etc. are extracted from the earth the company records the cost of extraction to the particular unit of the natural resource that is being extracted and the process of allocating cost according to the usage of natural resource during a specific period is called as depletion.

Requirement 1:

Depletion rate per ton for Oxford Quarries.

Explanation

Calculation of Depletion rate per ton:

Firstly we have to determine the cost of the stone in order to calculate the depletion rate. The cost of the natural resource includes all costs necessary to get the quarry in use...

To determine

Concept introduction:

Depletion:

When natural resources such as coal, iron ore, oil reserves and mineral etc. are extracted from the earth the company records the cost of extraction to the particular unit of the natural resource that is being extracted and the process of allocating cost according to the usage of natural resource during a specific period is called as depletion.

Requirement 2:

To explain:

Prepare journal entry to record the extraction of stone.

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