Chapter 8, Problem 34AP

a.

To determine

Prepare the journal entries for Company P.

Explanation of Solution

Depletion:

Depletion is a concept which is same as depreciation. It is the allocation of cost of natural resources to expense over resource’s the useful time in a systematic and normal manner.

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

1. Prepare journal entry to record purchases of Year 1.

Date	Account title and Explanation	Debit ($)	Credit ($)
January 1,Year 1	Silver Mine	1,500,000
	Cash		1,500,000
	( To record purchase of silver mine)

Table (1)

• Silver mine is an asset and there is an increase in the value of asset. Hence, debit it by $1,500,000.
• Cash is an asset and there is a decrease in the value of asset. Hence, credit it by $1,500,000.

Date	Account title and Explanation	Debit ($)	Credit ($)
January 7,Year 1	Timber	1,600,000
	Land	100,000
	Cash		1,700,000
	( To record purchase of timber)

Table (2)

• Timber is an asset and there is an increase in the value of asset. Hence, debit it by $1,600,000.
• Land is an asset and there is an increase in the value of asset. Hence, debit it by $100,000.
• Cash is an asset and there is a decrease in the value of asset. Hence, credit it by $1,700,000

2. Prepare journal entry to record depletion on the Year 1.

Date	Account title and Explanation	Debit ($)	Credit ($)
December 31,Year 1	Depletion Expense (2)	210,000
	Silver Mine		210,000
	( To record depletion of silver mine)

Table (3)

• Depletion Expense is a component of stockholders’ equity and there is a decrease in the value of stockholders’ equity. Hence, debit it by $210,000.
• Silver mine is an asset and there is a decrease in the value of asset. Hence, credit it by $210,000.

Date	Account title and Explanation	Debit ($)	Credit ($)
December 31,Year 1	Depletion Expense (4)	800,000
	Timber		800,000
	( To record depletion of timber)

Table (4)

• Depletion Expense is a component of stockholders’ equity and there is a decrease in the value of stockholders’ equity. Hence, debit it by $800,000.
• Timber is an asset and there is a decrease in the value of timber. Hence, credit it by $800,000.

3. Prepare journal entries to record purchases of year 2.

Date	Account title and Explanation	Debit ($)	Credit ($)
January 2,Year 2	Gold Mine	2,700,000
	Cash		2,700,000
	( To record purchase of gold mine)

Table (5)

• Gold mine is an asset and there is an increase in the value of asset. Hence, debit it by $2,700,000.
• Cash is an asset and there is a decrease in the value of asset. Hence, credit it by $2,700,000.

Date	Account title and Explanation	Debit ($)	Credit ($)
January 9,Year 2	Oil Reserves	1,300,000
	Cash		1,300,000
	( To record purchase of oil reserves)

Table (6)

• Oil reserves are an asset and there is an increase in the value of asset. Hence, debit it by $1,300,000.
• Cash is an asset and there is an decrease in the value of asset. Hence, Credit it by $1,300,000.

4. Prepare journal entries to record the depletion of natural resources assets:

Date	Account title and Explanation	Debit ($)	Credit ($)
December 31,Year 2	Depletion Expense (5)	300,000
	Silver Mine		300,000
	( To record depletion of silver mine)

Table (7)

• Depletion Expense is a component of stockholders’ equity and there is a decrease in the value of stockholders’ equity. Hence, debit it by $300,000.
• Silver mine is an asset and there is a decrease in the value of asset. Hence, credit it by $300,000.

Date	Account title and Explanation	Debit ($)	Credit ($)
December 31,Year 2	Depletion Expense (6)	480,000
	Timber		480,000
	( To record depletion of timber)

Table (8)

• Depletion Expense is a component of stockholders’ equity and there is a decrease in the value of stockholders’ equity. Hence, debit it by $480,000.
• Timber is an asset and there is a decrease in the value of timber. Hence, credit it by $480,000.

Date	Account title and Explanation	Debit ($)	Credit ($)
December 31,Year 2	Depletion Expense (8)	216,000
	Gold Mine		216,000
	( To record depletion of gold mine)

Table (9)

• Depletion Expense is a component of stockholders’ equity and there is a decrease in the value of stockholders’ equity. Hence, debit it by $216,000.
• Gold mine is an asset and there is a decrease in the value of asset. Hence, credit it by $216,000.

Date	Account title and Explanation	Debit ($)	Credit ($)
December 31,Year 2	Depletion Expense (10)	250,000
	Oil Reserves		250,000
	( To record depletion of oil reserves)

Table (10)

• Depletion Expense is a component of stockholders’ equity and there is a decrease in the value of stockholders’ equity. Hence, debit it by $250,000.
• Oil reserves are an asset and there is a decrease in the value of asset. Hence, credit it by $250,000.

Working notes:

Calculate the rate of silver ore per ton:

$\begin{array}{c}\text{Rate}\text{of}\text{silver}\text{ore}\text{per}\text{ton}\text{=}\frac{\text{Purchase}\text{price}\text{of}\text{silver}\text{ore}}{\text{Estimated}\text{yield}\text{of}\text{silver}\text{ore}}\\ \text{=}\frac{\text{\$1,500,000}}{\text{100,000}\text{tons}}\\ \text{=\$15per}\text{ton}\end{array}$ (1)

Calculate the depletion expense of silver ore mine for Year 1:

$\begin{array}{c}\begin{array}{l}\text{Depletion}\text{Expense}\\ \text{of}\text{silver}\text{ore}\text{mined}\end{array})\text{=Tons}\text{of}\text{silver}\text{ore}\text{mined}\text{×}\text{Rate}\text{per}\text{ton(1)}\\ \text{=14,000tons×\$15}\\ \text{=}\text{\$210,000}\end{array}$ (2)

Calculate the rate per board feet of timber:

$\begin{array}{c}\text{Rate}\text{per}\text{feet}\text{=}\frac{\text{Purchase}\text{price}\text{of}\text{land}-\text{Appraisal}\text{of}\text{land}}{\text{Estimated}\text{yield}\text{of}\text{timber}}\\ \text{=}\frac{\text{\$1,700,000}-\text{\$100,000}}{\text{1,000,000feet}}\\ \text{=}\frac{\text{\$1,600,000}}{\text{1,000,000feet}}\\ \text{=}\text{\$1}\text{.60per}\text{board}\text{feet}\end{array}$ (3)

Calculate the depletion expense of timber for Year 1:

$\begin{array}{c}\begin{array}{l}\text{Depletion}\text{Expense}\\ \text{of}\text{timber}\end{array})\text{=Number}\text{of}\text{board feet}\text{cut}\left(\text{lumber}\right)\text{×}\text{Rate}\text{per}\text{feet(3)}\\ \text{=500,000 boards×\$1}\text{.60}\\ \text{=}\text{\$800,000}\end{array}$ (4)

Calculate the depletion expense of silver ore mined for Year 2:

$\begin{array}{c}\begin{array}{l}\text{Depletion}\text{Expense}\\ \text{of}\text{silver}\text{ore}\text{mined}\end{array})\text{=Tons}\text{of}\text{silver}\text{ore}\text{extracted}\text{×}\text{Rate}\text{per}\text{ton(1)}\\ \text{=20,000tons×\$15}\\ \text{=}\text{\$300,000}\end{array}$ (5)

Calculate the depletion expense of timber for Year 2:

$\begin{array}{c}\begin{array}{l}\text{Depletion}\text{Expense}\\ \text{of}\text{timber}\end{array})\text{=Number}\text{of}\text{board feet}\text{cut}\left(\text{lumber}\right)\text{×}\text{Rate}\text{per}\text{feet(3)}\\ \text{=300,000 boards×\$1}\text{.60}\\ \text{=}\text{\$480,000}\end{array}$ (6)

Calculate the rate of gold mine per ton:

$\begin{array}{c}\text{Rate}\text{of}\text{gold}\text{mine}\text{per}\text{ton}\text{=}\frac{\text{Purchase}\text{price}\text{of}\text{gold}\text{mine}}{\text{Estimated}\text{yield}\text{of}\text{gold}\text{mine}}\\ \text{=}\frac{\text{\$2,700,000}}{\text{50,000}\text{tons}}\\ \text{=\$54per}\text{ton}\end{array}$ (7)

Calculate the depletion expense of gold mine for Year 2:

$\begin{array}{c}\begin{array}{l}\text{Depletion}\text{Expense}\\ \text{of}\text{gold}\text{ore}\end{array})\text{=Tons}\text{of}\text{gold}\text{ore}\text{extracted}\text{×}\text{Rate}\text{per}\text{ton(7)}\\ \text{=}\text{4,000}\text{tons×\$54}\\ \text{=}\text{\$216,000}\end{array}$ (8)

Calculate the rate of oil per barrel:

$\begin{array}{c}\text{Rate}\text{of}\text{oil}\text{per}\text{barrel}\text{=}\frac{\text{Purchase}\text{price}\text{of}\text{oil}\text{reserves}}{\text{Number}\text{of}\text{oil}\text{barrels}\text{extracted}}\\ \text{=}\frac{\text{\$1,300,000}}{\text{260,000}\text{barrels}}\\ \text{=\$5per}\text{barrel}\end{array}$ (9)

Calculate the depletion expense of oil reserves for Year 2:

$\begin{array}{c}\begin{array}{l}\text{Depletion}\text{Expense}\\ \text{of}\text{oil}\text{reserves}\end{array})\text{=Barrels of oil reserves}\text{extracted}\text{×}\text{Rate}\text{per}\text{barrel(9)}\\ \text{=}\text{50,000}\text{barrels}\text{×}\text{\$5}\\ \text{=}\text{\$250,000}\end{array}$ (10)

b.

To determine

Prepare the portion of the balance sheet that reports natural resources.

Explanation of Solution

Prepare partial balance sheet that reports natural resources.

Company P
Partial Balance Sheet
For the year ended December 31, Year 2
Natural Resources	Amount ($)
Silver Mine	(11) 990,000
Timber	(12) 320,000
Gold Mine	(13) 2,484,000
Oil Reserves	(14) 1,050,000
Total Natural Resources	4,844,000
Land	100,000
Total	4,944,000

Table (11)

Working notes:

Calculate the Book value of silver mine:

$\begin{array}{c}\text{Book}\text{value}\text{of}\text{Silver}\text{mine}\text{=}\left(\begin{array}{l}\text{Purchase}\text{price}\text{of}\text{siler}\text{mine}-\\ \text{Depletion}\text{expense}\text{of}\text{year}\text{1}-\\ \text{Depletion}\text{expense}\text{of}\text{Year}\text{2}\end{array}\right)\\ \text{=\$1,500,000}-\text{\$210,000}-\text{\$300,000}\\ \text{=\$990,000}\end{array}$ (11)

Calculate the Book value of Timber:

$\begin{array}{c}\text{Book}\text{value}\text{of}\text{Timber}\text{=}\left(\begin{array}{l}\text{Purchase}\text{price}\text{of}\text{timber}-\text{Depletion}\text{expense}\text{of}\text{year}\text{1}\\ -\text{Depletion}\text{expense}\text{of}\text{Year}\text{2}\end{array}\right)\\ \text{=\$1,600,000}-\text{\$800,000}-\text{\$480,000}\\ \text{=\$320,000}\end{array}$ (12)

Calculate the Book value of Gold mine:

$\begin{array}{c}\text{Book}\text{value}\text{of}\text{gold}\text{mine}\text{=}\left(\begin{array}{l}\text{Purchase}\text{price}\text{of}\text{gold}\text{mine}-\\ -\text{Depletion}\text{expense}\text{of}\text{Year}\text{2}\end{array}\right)\\ \text{=\$2,700,000}-\text{\$216,000}\\ \text{=\$2,484,000}\end{array}$ (13)

Calculate the book value of Oil Reserves:

$\begin{array}{c}\text{Book}\text{value}\text{of}\text{oil}\text{reserves}\text{=}\left(\begin{array}{l}\text{Purchase}\text{price}\text{of}\text{oil}\text{reserves}-\\ -\text{Depletion}\text{expense}\text{of}\text{Year}\text{2}\end{array}\right)\\ \text{=\$1,300,000-\$250,000}\\ \text{=\$1,050,000}\end{array}$ (14)

c.

To determine

Prepare the depletion journal entry for Year 3.

Explanation of Solution

Prepare journal entry:

Date	Account title and Explanation	Debit ($)	Credit ($)
Year 3	Depletion Expense (17)	1,242,000
	Gold Mine		1,242,000
	( To record depletion of gold mine)

Table (12)

• Depletion Expense is a component of stockholders’ equity and there is a decrease in the value of stockholders’ equity. Hence, debit it by $1,242,000.
• Gold mine is an asset and there is a decrease in the value of asset. Hence, credit it by $1,242,000.

Working notes:

Calculate the undepleted cost of gold mine for at the beginning of Year 3:

$\begin{array}{c}\begin{array}{l}\text{Undepleted}\text{cost}\text{of}\\ \text{gold}\text{mine}\text{at}\text{the}\text{beginning}\text{of}\text{year}\text{3}\end{array})\text{=}\left(\begin{array}{l}\text{Purchase}\text{price}\text{of}\text{gold}\text{mine}-\\ \text{Depletion}\text{expense}\text{of}\text{year}\text{2}\end{array}\right)\\ \text{=\$2,700,000}-\text{\$216,000}\\ \text{=\$2,484,000}\end{array}$ (15)

Calculate the rate of gold mine per ton:

$\begin{array}{c}\text{Rate}\text{of}\text{gold}\text{mine}\text{per}\text{ton}\text{=}\frac{\text{Undepleted}\text{cost}\text{of}\text{gold}\text{mine}}{\text{Tons}\text{of}\text{gold}\text{ore}\text{remaining}}\\ \text{=}\frac{\text{\$2,484,000}}{\text{20,000}\text{tons}}\\ \text{=\$124}\text{.20per}\text{ton}\end{array}$ (16)

Calculate the depletion expense of gold mine for Year 3:

$\begin{array}{c}\begin{array}{l}\text{Depletion}\text{Expense}\\ \text{of}\text{gold}\text{ore}\end{array})\text{=Tons}\text{of}\text{gold}\text{ore}\text{extracted}\text{×}\text{Rate}\text{per}\text{ton(16)}\\ \text{=}10\text{,000}\text{tons×\$124}\text{.20}\\ \text{=}\text{\$1,242,000}\end{array}$ (17)