Salter Mining Company purchased the Northern Tier Mine for $52 million cash. The

Question

Salter Mining Company purchased the Northern Tier Mine for $52 million cash. The mine was estimated to contain 8 million tons of ore and to have a residual value of $3.5 million. During the first year of mining operations at the Northern Tier Mine, 95,000 tons of ore were mined, of which 14,000 tons were sold.

a. Prepare a journal entry to record depletion during the year. (Round your intermediate calculations to two decimal places. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Explanation / Answer

Depreciation per ton under depletion method

= (Purchase price - Residual value) / Total estimated production during the life

= ($52 million - $3.5 million) / 8 million tons

= $ 6.06 per ton

Depreciation for the first year = Tons mined x Depreciation per ton

= 95,000 tons x $ 6.06

= $ 575,700

Journal Entry

Date Particulars Amount Dr Amount Cr 31st Dec Depreciation on Mine          575,700 Accumulated Depreciation on Mine          575,700 (Being depreciation recorded for first year for 95,000 toms @ $ 6.06 per ton)

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