Question

Great Northern Iron Ore Properties purchased a mine for $25,000,000. It is expected that the mine can be sold for $1,500,000 after all of the taconite has been mined. The mine contains approximately 8,000,000 tons of iron ore. 1,000,000 tons of iron ore were mined in year 1. 1,500,000 tons of iron ore were mined in year 2.

Calculate the amount of depletion for years 1 and 2. Record the journal entry for each year.

At the beginning of year 3, 1,750,000 tons of iron ore were sold. Compute cost of goods sold and ending inventory.

Answer 1

Depletion rate = (25000000-1500000)/8000000 = 2.9375 per ton

Depletion for first year = 1000000*2.9375 = 2937500

Deption for second year = 1500000*2.9375 = 4406250

Journal entry :

Date	account & explanation	debit	credit
Year 1	Depletion expense	2937500
	Accumlated depletion		2937500
	(To record depletion)
Year 2	Depletion expense	4406250
	Accumlated depletion		4406250
	(To record depletion )

Cost of goods sold = 1750000*2.9375 = 5140625

Ending inventory = (2500000-1750000)*2.9375 = 2203125