Explanation Depletion: Depletion is a process in which the cost of natural resources like oil reserves, mineral deposits, and timber tracts, is allocated equally over the extraction or harvesting period of the asset. When a resource is depleted, the value of resource is decreased and the value of extracted inventory obtained is increased. So, depletion is recorded on the balance sheet, and not on the income statement. But the Cost of Goods Sold expense is recorded when the extracted inventory is sold. Depreciation expense : Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset. Amortization : Amortization is a process in which the cost of intangible assets is spread equally over the limited or definite useful life of asset. Prepare journal entries to record the given transaction as follows: a. Prepare journal entries to record the purchase of the land: Date Account Title and Explanation Post Ref. Debit ($) Credit ($) February 19 Mineral deposit (land) 5,400,000 Cash 5,400,000 (To record the purchase of the land containing recoverable ore) Table (1) Mineral deposit (land) is an asset account and it increases the value of asset. Therefore, debit Mineral deposit (land) account by $5,400,000. Cash is an asset account and it decreases the value of asset. Therefore, credit Cash account by $5,400,000. b. Prepare journal entries to record the cost and installation of machinery: Date Account Title and Explanation Post Ref. Debit ($) Credit ($) March 21 Machinery 400,000 Cash 400,000 (To record the cost and installation of machinery) Table (2) Machinery is an asset account and it increases the value of asset. Therefore, debit Machinery account by $400,000. Cash is an asset account and it decreases the value of asset. Therefore, credit Cash account by $400,000. c. Prepare journal entries to record the depletion for 5 months: Date Account Title and Explanation Post Ref. Debit ($) Credit ($) December 31 Depletion expense-Mineral deposit (2) 342,900 Accumulated depreciation -Mineral deposit 342,900 (To record the cost of depletion) Table (3) Working notes: Compute the Depletion expense: Rate per ton = Cost acquired Number of tons of ore = $ 5 , 400 , 000 $ 4 , 000 , 000 = $ 1. 35per ton (1) Depletion expenses = [ Number of tons sold during the five months × Rate per ton (1) ] = 254 ,000 tons of ore × $ 1

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Chapter 10, Problem 7BP

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Prepare journal entries to record the given transaction and describe both the difference and similarities in amortization, depletion and depreciation.

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On February 19 of the current year, Quartzite Co. pays $5,400,000 for land estimated to contain 4 million tons of recoverable ore. It installs and pays for machinery costing $400,000 on March 21. The company removes and sells 254,000 tons of ore during its first nine 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 the machinery, (c) the first nine months’ depletion assuming the land has a net salvage value of zero after the ore is mined, and (d) the first nine months’ depreciation on the machinery. Analysis Component (e) If the machine will be used at another site when extraction is complete, how would we depreciate this machine?

On April 2, 2015, Montana Mining Co. pays $4,170,260 for an ore deposit containing 1,438,000 tons. The company installs machinery in the mine costing $199,600, with an estimated seven-year life and no salvage value. The machinery will be abandoned when the ore is completely mined. Montana begins mining on May 1, 2015, and mines and sells 167,800 tons of ore during the remaining eight months of 2015. Prepare the December 31, 2015, entries to record both the ore deposit depletion and the mining machinery depreciation. Mining machinery depreciation should be in proportion to the mine’s depletion. (Do not round intermediate calculations. Round your final answers to the nearest whole number.) 1. Record the year-end adjusting entry for the depletion expense of ore mine. 2. Record the year-end adjusting entry for the depreciation expense of the mining machinery.

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 and pays for machinery costing $410,000 on July 25. 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 (e) If the machine will be used at another site when extraction is complete, how would we depreciate this machine?

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Principles of Financial Accounting.

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