Question

Perez Company acquires an ore mine at a cost of $4,200,000. It incurs additional costs of $1,176,000 to access the mine, which is estimated to hold 3,000,000 tons of ore. 280,000 tons of ore are mined and sold the first year. The estimated value of the land after the ore is removed is $600,000. Calculate the depletion expense from the information given. 1. & 2. Prepare the entry to record the cost of the ore mine and year-end adjusting entry.

Answer 1

	Particulars	$
	Cost of Ore mine	$       4,200,000
Add	Development cost to get mine ready for use	$       1,176,000
Less	Residual value of Land	$        (600,000)
	Depletion Base	$       4,776,000
	Estimated production in tons	3,000,000
	Depletion cost per ton	$                1.59
	Tons of Ore extracted in 1st year	280,000
	Depletion cost for year 1	$          445,760
Date	Particulars	Debit $	Credit $
Purchase date	Ore mine	$       4,200,000
	Development cost	$       1,176,000
	Cash		$ 5,376,000
	[Acquisition of Ore mine recorded]
Year end	Cost of Goods sold	$          445,760
	Accumlated depletion		$    445,760
	[Depletion expense for ore extracted and sold recorded in COGS]

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