A company purchased a tract of land for its natural resources at a cost of $1,500,000.It expects to mine 2,000,000 tons of ore from this land.The salvage value of the land is expected to be $250,000.If 150,000 tons of ore are mined during the first year,the journal entry to record the depletion is:
A)Debit Depletion Expense $93,750;credit Natural Resources $93,750.
B)Debit Cash $112,500;credit Natural Resources $112,500.
C)Debit Depletion Expense $93,750;credit Accumulated Depletion $93,750.
D)Debit Cash $93,750;credit Accumulated Depletion $93,750.
E)Debit Depletion Expense $112,500;credit Accumulated Depletion $112,500.

Question

Quizplus · Accepted Answer

Depletion expense is the cost of the natural resources that have been used up or mined. The formula for depletion expense is (total cost of natural resources - salvage value) / total estimated amount of natural resources.

In this case, the depletion expense for 150,000 tons of ore would be:
($1,500,000 - $250,000) / 2,000,000 = $0.625 per ton of ore

Therefore, the journal entry to record the depletion for 150,000 tons of ore would be:
Debit Depletion Expense: 150,000 x $0.625 = $93,750
Credit Accumulated Depletion: $93,750

Option C is the best choice as it records the depletion expense in the Depletion Expense account and accumulates it in the Accumulated Depletion account. Option A records only the depletion expense and leaves out the accumulated depletion account, which is necessary for proper financial reporting. Options B and D record cash transactions, which are not relevant to depletion accounting. Option E records a higher depletion expense, which is not correct based on the calculation above.

A Company Purchased a Tract of Land for Its Natural