Question

At the beginning of 2017, Blossom Company, a small private company, acquired a mine for $850,000. Of this amount, $100,000 was allocated to the land value and the remaining portion to the minerals in the mine. Surveys conducted by geologists found that approximately 12 million units of ore appear to be in the mine. Blossom had $170,000 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 $40,000. During 2017, 2.5 million units of ore were extracted and 2.20 million of these units were sold.

Instructions:

(a) Calculate the depletion cost per unit for 2017.

(b) The total amount of depletion for 2017 and prepare the required journal entry, if any.

(c) The total amount that is charged as an expense for 2017 for the cost of minerals sold during 2017 and prepare the required journal entry, if any.

Answer 1

Solution:

a) Depletion cost per unit = ($850,000 + $170,000 + $40,000 - $100,000) 12,000,000

= 0.08 depletion per unit

b) Total amount of depletion for 2017 = No. of units extracted × depletion per unit

= 2,500,000 × 0.08

Total amount of depletion for 2017 = $200,000

(No entry is required)

c)  Total amount that is charged as an expense for 2017 = 2,200,000 × 0.08

= $176,000 charged to cost of goods sold for 2017.

journal entry

Coal Inventory $24,000

Depletion Expenses $176,000

Coal mine assets $200,000

(To record depletion expenses)