Question

Recording Depletion

MacLean Mining Co. acquired mineral rights for $21,477,500. The mineral deposit is estimated at 30,500,000 tons. During the current year, 4,575,000 tons were mined and sold.

a. Determine the amount of depletion expense for the current year. Do not round intermediate calculation and round your answer to nearest whole value.
$

b. Illustrate the effects on the accounts and financial statements of the depletion expense. For decreases in accounts or outflows of cash, enter your answers as negative numbers. If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank.

Statement of Cash Flows	Balance Sheet
	Assets				=	Liabilities	+	Stockholders' Equity
	-?		+?		=	?	+		?
	?		?			?			?
Statement of Cash Flows									Income Statement
?									?

Answer 1

a) Depletion base = $21477500

Now, we have to calculate unit depletion rate,

Unit depletion = Depletion base / Estimates recoverable units = $21477500 / 30500000 = $0.70418 per ton.

Depletion expense for current year = Unit depletion * units mined

= $0.70418 * 4575000 = $3221630

b) Effect on income statement: Income statement will decrease by the of $3221630, because it is an expense.

Effect on Balance sheet: Balance sheet will be increased by the ending inventory amount of $18255870, calculated as under:

Ending inventory = Units left * Depletion rate = (30500000 - 4575000 ) * $0.70418 = 25925000 * $0.70418 = $18255870.

Effect on statement of cash flows: Cash flows will be increased by the depletion expense of $3221630. It will increase the cash flows from operating activities.

Effect on stockholder's equity: There will be no effect on stockholder's equity.