Question

At the beginning of 2018, Blue Dragon, a small private company, acquired a mine for $1,925,000. Of this amount, $190,000 was allocated to the land value and the remaining portion to the minerals in the mine. Surveys conducted by geologists found that approximately 18 million units of ore appear to be in the mine. Blue Dragon had $175,000 of development costs for this mine before any extraction of minerals. It also determined that the fair value of its obligation to prepare the land for an alternative use when all of the minerals have been removed was $70,000. During 2018, 3.0 million units of ore were extracted and 2.10 million of these units were sold.

Calculate the depletion cost per unit for 2018. (Round answer to 3 decimal places, e.g. 52.751.)
Depletion Cost Per Unit: $________

Prepare the required journal entry, if any, for the total amount of depletion for 2018. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Debit Credit

________

________

Prepare the required journal entry, if any, for the total amount that is charged as an expense for 2018 for the cost of minerals sold during 2018. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

Account Debit Credit

______

______

Answer 1

Answer:-

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1)Depletion cost per unit for 2020 = $0.11

2)Ore inventory and depletion expense will be debited by $99,000 and $231,000 respectively and accumulated depletion will be credited by $330,000.

3)Cost of goods sold will be debited and inventory will be credited by $231,000.

Explanation:-

1)Depletion cost per unit for 2020

= (Cost of mine acquired - Land value + Development costs + Fair value of obligation) / Total number of estimated units

= ($1,925,000 -$190,000 + $175,000 + $70,000) / $18,000,000

      = $0.11

2)Total amount of depletion = Extracted units of ore * Depletion cost per unit

                                          = 3,000,000 * $0.11 = $330,000

Depletion Expense = (Total depletion / unit extracted) * Units sold

                               = ($330,000 / 3,000,000) * 2,100,000

                               = $231,000

3)Cost of goods sold = Units sold * Depletion cost per unit

                               = 2,100,000 * $0.11 = $231,000