On July 23 of the current year, Dakota Mining Co. pays $5,719,680 for land estim

Question

On July 23 of the current year, Dakota Mining Co. pays $5,719,680 for land estimated to contain 7,944,000 tons of recoverable ore. It installs machinery costing $714,960 that has a 10-year life and no salvage value and is capable of mining the ore deposit in eight years. The machinery is paid for on July 25, seven days before mining operations begin. The company removes and sells 407,000 tons of ore during its first five months of operations ending on December 31. Depreciation of the machinery is in proportion to the mine

Explanation / Answer

(a) To record the purchase of the land.

Land                   $5,719,680
Cash                                     $5,719,680
________________________________________

(b) To record the cost and installation of machinery.

Machinery            $714,960
   Cash                                   $714,960
____________________________________________

(c) To record the first five months' depletion assuming the land has a net salvage value of zero after the ore is mined.

Depletion expense per ton = $5,719,680 / 7,944,000 = $0.72 per ton
Current year's depletion expense =  407,000 x $0.72 = $293,040

Depletion Expense            $293,040
Accumulated Depletion                  $293,040
_________________________________________________

(d) To record the first five months' depreciation on the machinery.

Cost of machinery               = $714,960
Estimated life                    = 8 years
Depreciation per year         = $714,960 / 8 = $89,370
Depreciation for 5 months = $89,370 x 5 / 12 = $37,237

Depreciation Expense               $37,237
   Accumulated Depreciation                   $37,237

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