Question

Mining Corp acquired a parcel of land for $4,000,000. It was estimated that the property contained 300,000 tons of mineral reserves. Federal law requires that mined properties be restored to a natural condition after mining is completed. It is expected that restoration costs will total $400,000 and that the restored land could be resold for $200,000. During the year, the company extracted 25,000 tons (of which 15,000 tons were sold) of mineral reserves from the property.

1.try to record the purchase (show the cost allocation).

2.What is the depletion amount per ton related to the mineral reserves acquired (round to 2 decimal points)?

3.What is Mining Corp’s cost of goods sold ($ amount) for the year?

4.Prepare the journal entry(s) related to the extraction and sale.

Answer 1

Answer 1. Journal entry to record the purchase : -

Cost of acquisition - $4,000,000

Restoration Cost - $400,000

Total Cost - $4,400,000

	Particulars	Dr. / Cr.	Amount (in $)
	Land A/c (inculding cost of restoration)	Dr.	4,400,000
	Cash / Bank A/c	Cr.	4,000,000
	Assets retirement obligation (restoration cost) A/c	Cr	400,000

Answer 2. Calculation of depletion amount per ton: -

= Total cost of land (inculding restoration cost) - salvage value / total mineral reserve acquired

= ($4,000,000 + $400,000 - $200,000) / 300,000

= $14.00 per ton

Answer 3. Calculation of COGS of mining corp for the year: -

= Cost per ton of mineral reserve x sales (in ton)

= $14 per ton x 15,000 ton

=$210,000

Answer 4. Journal entry for extraction & sale: -

	Particulars	Dr. / Cr.	Amount (in $)
For Extraction	Mining Corp's Inventory A/c	Dr.	140,000
	Dpletion Expense	Dr	210,000
	Coal Mine Assets	Cr	350,000

Assume 15,000 ton were sold at the price of 250,000 (as sale price is not given)

	Particulars	Dr. / Cr.	Amount (in $)
For Sale	Customer's A/c	Dr.	250,000
	Sales	Cr.	250,000