Question

In March, 2017, Mayton Mining Co. purchased a coal mine for $12,000,000. Total possible coal to be mined is estimated at 2,000,000 tons. Mayton is required by law to restore the land to a reasonable condition after the conclusion of mining operations at an estimated cost of $750,000. Mayton estimates the land will then be worth $2,000,000. The company incurred $2,800,000 of development costs preparing the mine for production. During 2017, 400,000 tons were removed and 310,000 tons were sold.

Calculate the depletion that Mayton had in 2017 and prepare the depletion journal entry. Also prepare the entry to COGS for the sales during 2017.

Answer 1

Calculation of Depletion for 2017:

Purchase cost of coal mine	$12,000,000
Add: Estimated costs to restore the land	$750,000
Less: Cost of Land	($2,000,000)
Add: Development costs for mine	$2,800,000
Total Costs of Mine (a)	$13,550,000
Total Estimated Tons (b)	2,000,000
Cost per Ton (a / b)	$6.78
Depletion Costs ($6.78 * 400,000 tons)	$2,710,000

Therefore, depletion costs for 2017 is $2,710,000.

Journal Entries:

Date	Account Titles and Explanations	Debit	Credit
2017	Depletion Expense	$2,710,000
	Accumulated Depletion		$2,710,000
	(To record the depletion for 2017)
Date	Account Titles and Explanations	Debit	Credit
2017	Cost of Goods Sold (310,000 tons * $6.78)	$2,100,250
	Coal Mine		$2,100,250
	(To record the cost of goods sold)