On July 23 of the current year, Dakota Mining Co. pays $4,715,000 for land estim

Question

On July 23 of the current year, Dakota Mining Co. pays $4,715,000 for land estimated to contain 5,125,000 tons of recoverable ore. It installs machinery costing $410,000 that has a 10-year life and no salvage value and is capable of mining the ore deposit in 8 years. The machinery is paid for on July 25, seven days be- fore mining operations begin. The company removes and sells 480,000 tons of ore during its first five months of operations ending on December 31. Depreciation of the machinery is in proportion to the mine's depletion as the machinery will be abandoned after the ore is mined. Required Prepare entries to record (a) the purchase of the land, (b) the cost and installation of machinery, (c) the first five months' depletion assuming the land has a net salvage value of zero after the ore is mined, and (d) the first five months' depreciation on the machinery Analysis Component Describe both the similarities and differences in amortization, depletion, and depreciation

Explanation / Answer

Amortization, depreciation and Depletion are all decreases in the value of a long term asset.

While Amortization is the term used in respect of an intangible asset, depreciation is in terms of long term fixed assets, and Depletion is used in case of resources, particularly natural resources such as mines.

While depreciation happens over time due to passage of time or obsolescence, Depletion is based on actual usage of the resource.

Date Particulars Debit Credit a July 23 Dr: Land 4,715,000 Cr: Bank 4,715,000 b July 23 Dr: Machinery 410,000 Cr: Bank 410,000 c Dr: Depletion expense 441,600 Cr: Accumulated Depletion 441,600 (4715000*480000/5125000)

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