Carmel Company acquires a mineral deposit at a cost of $5,900,000. It incurs additional costs of $600,000 to access the deposit, which is estimated to contain 2,000,000 tons and is expected to take 5 years to extract. What journal entry would be needed to record the expense for the first year assuming 418,000 tons were mined?

Question

Quizplus · Accepted Answer

Depletion expense is used to record the reduction in the value of natural resources as they are extracted. Since this is a mineral deposit, depletion expense would be used. The formula to calculate depletion expense is (total cost – salvage value) / total units expected, which in this case would be ($5,900,000 + $600,000) / 2,000,000 = $3.25 per ton. Therefore, for the first year with 418,000 tons being mined, the depletion expense would be $3.25 x 418,000 = $1,358,500, which would be recorded by debiting Depletion Expense and crediting Accumulated Depletion.

Carmel Company Acquires a Mineral Deposit at a Cost of $5,900,000