In January 2016, Omi Mining Corporation purchased a mineral mine for $4,200,000
ID: 2570229 • Letter: I
Question
In January 2016, Omi Mining Corporation purchased a mineral mine for $4,200,000 with removable ore estimated by geological surveys at 2,500,000 tons. The property has an estimated value of $400,000 after the ore has been extracted. Omi incurred $1,150,000 of development costs preparing the property for the extraction of ore. During 2016, 340,000 tons were removed and 300,000 tons were sold.
Required:
i) Prepare the journal entry to record depletion for the year ended December 31, 2016, Omi does not use the accumulated depletion account.
ii) For the year ended December 31, 2016, Omi should include what amount of depletion in its cost of goods sold? Prepare the necessary journal entry.
Explanation / Answer
Total capitalized cost =Purchase cost+development cost
= 4,200,000+1,150,000
= $ 5,350,000
cost per ton =[cost -salvage]/total life in tons
=[5350000-400000]/2,500,000
= 1.98 per ton
i)Depletion expense related to ending inventory : [tons extracted -tons sold ]*rate per ton
=[340000-300000]*1.98
= 79200
Depletion expense related to unit sold : 300000*1.98 =$ 594000
ii)Depletion expense included in cost of goods sold amounts to $ 594000
Date Account Debit credit December 31 2016 Depletion expense 594000 Mineral inventory 79200 mineral mine asset 673200 [Being depletion expense for the ton extracted recorded] ii Depletion expense 594000 Mineral mine asset 594000 [Being depletion expense related to cost of sales recorded]Related Questions
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