On July 1 of the current year, Glover Mining Co. pays $5,400,000 for land estima

Question

On July 1 of the current year, Glover Mining Co. pays $5,400,000 for land estimated to contain 7.200,000 tons of recoverable ore. It installs machinery on July 3 costing $864,000 that has an 8 year life and no salvage value and is capable of mining the ore deposit in six years. The company removes and sells 745,000 tons of ore during its first six 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. Prepare the entries Glover must record for (a) the purchase of the ore deposit, (b) the costs and installation of the machinery, (c) the depletion assuming the land has a zero salvage value, and (d) the depreciation on the machinery

Explanation / Answer

a)

Journal:

Land with ore Dr 5400000

Cash Cr 5400000

b)

Machinery Dr 864000

Cash Cr 864000

c)

Depletion on ore = (745000/7200000)*5400000 = 558750

Journal Entry:

Depletion Expense Dr 558750

Land with Ore Cr 558750

d)

Depreciation on Machinery for 6 months = 864000/6 * (1/2) = 72000

Journal Entry:

Depreciation Expense Dr 72000

Machinery Cr 72000

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