Coal Train Mines paid $435000 for the right to extract ore from a 225000-ton mineral deposit. In addition to the purchase price, Coal Train Mines also paid a $115 filing fee to the country recorder, a $2000 license fee to the state of Colorado, and $69135 for a geologic survey. Because the company purchased the rights to the minerals only, it expects this mineral rights asset to have a residual value of zero when it is fully depleted. During the first year of production, Coal Train Mines removed 48000 tons of ore, of which it sold 45000 tons. Requirement:
Make journal entries to record (a) purchase of the mineral rights, (b) payment of fees and other costs, (c) depletion for first-year production, and (d) sales of ore.
A) Record the purchase of the mineral rights.
Journal
Date Accounts Debit Credit
B) Record the payment of fees and other costs.
Journal
Date Accounts Debit Credit
C) Record the depletion for first-year production.
Journal
Date Accounts Debit Credit
D) Record the sales of ore.
Journal
Date Accounts Debit Credit

Coal Train Mines

Journal Entries:

A) Record the purchase of the mineral rights.

Date            Accounts               Debit          Credit

         Mineral Rights             $435,000

         Cash Account                                   $435,000

To record the purchase of the mineral rights.

B) Record the payment of fees and other costs.

Journal

Date Accounts                        Debit             Credit

        Fees and other costs    $71,250

        Cash Account                                      $71,250

To record $115 filing fee, $2,000 license fee, and $69,135 for geological survey.

C) Record the depletion for first-year production.

Journal

Date       Accounts                   Debit         Credit

Dec 31    Depletion Expense  $101,250

               Accumulated Depletion             $101,250

To record the depletion charge for the year.

D) Record the sales of ore.

Journal

Date    Accounts             Debit        Credit

           Cash                    $

           Sales Revenue                     $

To record the sale of 45,000 tons of ore

Explanation:

a) Depletion is an accrual accounting technique.  It allocates the cost of extracting natural resources such as timber, minerals, and oil from the earth by using the percentage of extracted resources over the total resources.  Depletion is a non-cash expense, like depreciation and amortization, that lowers the cost value of an asset incrementally through scheduled charges to the income statement.  While depletion is for natural resources, depreciation is for property, plant, and equipment, while amortization is used for intangible assets.

b) The total cost to be capitalized = $506,250 ($435,000 + $71,250)

c) Depletion charge for the first year = $101,250 (45,000/225,000 * $506,250).  Depletion per unit is $2.25

d) The selling price was not indicated, so no sales value was calculated.

e) Ending Inventory = $6,750 (48,000 - 45,000 * $2.25)

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