Question

On April 2, 2016, Montana Mining Co. pays $3,059,900 for an ore deposit containing 1,455,000 tons. The company installs machinery in the mine costing $228,000, with an estimated seven-year life and no salvage value. The machinery will be abandoned when the ore is completely mined. Montana begins mining on May 1, 2016, and mines and sells 180,000 tons of ore during the remaining eight months of 2016.

Prepare the December 31, 2016, entries to record both the ore deposit depletion and the mining machinery depreciation. Mining machinery depreciation should be in proportion to the mine’s depletion. (Do not round intermediate calculations. Round your final answers to the nearest whole number.)

Answer 1

Given, Amount

Cost price of Ore Deposit $3059900

Tons Of Ore to be mined 1455000 Tons

Cost of the machine $228000

Life of Machine 7 Years

Salvage value after & years Nil

Note 1:

Depletion per unit = (Cost - Salvage value)/Total Units of Capacity

= ($3059900-0)/1455000Tons

= $2.1 per ton

Depletion for 8 months till 31/12/2016 = Depletion per unit * units extracted

= $2.1* 180000tons

=$378000

Note 2:

Since mining machinery depreciation should be in proportion to the mine's depletion. Therefore,

Depreciation For mining machine = cost of machine * [(mines units sold)/ Total Units of capacity]

= $228000*[180000/1455000]

=$228000*0.124

=$28272

Journal Entries for December 2016,

Date Particulars Debit (Amount) Credit(Amount)

April 2, 2016 Mine A/c $3059900

To Cash   $3059900

(Being the Ore deposit purchased)

May 1, 2016 Machinery A/c $228000

To Cash $228000

( Being the machinery Purchased)

Dec 31, 2016 Mine A/c $378000

To Accumulated Depletion A/c $378000

(Being Depletion of Ore Deposit recorded for 8 months)

Refer Note 1 for the above amounts

Dec 31, 2016 Depreciation A/c $28272

To Accumulated Depreciation   $28272

(Being Depreciation on machine recorded)

Refer Note 2 for the above amounts