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:

Question

Quizplus · Accepted Answer

Depletion is the process of allocating the cost of natural resources to the period in which they are consumed. The depletion base is the cost of the natural resources less any salvage value. In this case, the depletion base is ($1,500,000 - $250,000) = $1,250,000. The depletion rate is calculated as $1,250,000 ÷ 2,000,000 tons = $0.625 per ton.

Since 150,000 tons of ore are mined during the first year, the depletion expense is $0.625 × 150,000 = $93,750. The entry to record the depletion should be a debit to Depletion Expense for $93,750 and a credit to Accumulated Depletion for $93,750. Therefore, the best choice is C.

A Company Purchased a Tract of Land for Its Natural