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19 December, 12:34

Perez Company acquires an ore mine at a cost of $1,400,000. It incurs additional costs of $400,000 to access the mine, which is estimated to hold 1,000,000 tons of ore. 180,000 tons of ore are mined and sold the first year. The estimated value of the land after the ore is removed is $200,000. Calculate the depletion expense from the information given. (Do not round your intermediate calculations.)

Cost

Salvage

Amount subject to depletion

Total units of capacity

Depletion per unit (#.##)

Units extracted and sold in period

Depletion expense

1. Prepare the entry to record the cost of the ore mine.

2. Prepare the year-end adjusting entry.

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Answers (1)
  1. 19 December, 13:29
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    1. Journal Entry - See explanation section

    2. Adjusting Entry - See explanation section

    Explanation:

    Before we provide journal entries, we have to calculate the depletion expense according to the questions format.

    Cost (Purchase price + additional cost) $1,800,000

    Salvage value $ 200,000

    Amount subject to depletion $1,600,000

    Total units of capacity 1,000,000

    Depletion per unit $1.60

    Units extracted and sold in period 180,000

    Depletion expense $288,000

    Therefore, the journal entry to record the cost of the ore mine.

    Debit Ore mine $1,800,000

    Credit Cash $ 1,800,000

    Since, the cost of acquisition of a mine ore will be the combination of the cost of an ore mind, both have been added to determine the total cost.

    Adjusted entry will be-

    Depreciation expense Debit 288,000

    Accumulated depreciation Debit 288,000
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