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24 November, 10:47

Montana Mining Co. pays $3,721,000 for an ore deposit containing 1,525,000 tons. The company installs machinery in the mine costing $213,500, which will be abandoned when the ore is completely mined. Montana mines and sells 166,200 tons of ore during the year. Prepare the year-end entries to record both the ore deposit depletion and the mining machinery depreciation. Mining machinery depreciation should be in proportion to the mine's depletion.

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  1. 24 November, 10:57
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    Ore deposit depletion and Mining machinery depreciation Journal entries

    Dr Depletion charge (Ore deposits) 405,528

    Cr Accumulated depreciation 405,528

    Dr Depletion charge (Ore deposits) 23,268

    Cr Accumulated depreciation 23,268

    Explanation:

    Preparation of the year-end entries to record both the ore deposit depletion and the mining machinery depreciation of Montana Mining Co

    Depletion of natural resources can be defined as the way in which the cost of natural resources is apportioned upto the period when it will be utilized which is why they are shown at cost in balance sheet.

    The entry is to record depreciation charged on ore deposit depletion. Therefore To record this entry we have to debit depletion charges, and credit accumulated depreciation

    Dr Depletion charge (Ore deposits) 405,528

    Cr Accumulated depreciation 405,528

    Computation of depletion cost per unit:

    The depletion cost per unit can be calculated by dividing the net cost of the ore with the total units of capacity:

    Depletion/units = Cost - Salvage / Total unit of capacity

    $3,721,000/1,525,000 tons

    =$2.44

    Hence, depletion per unit is $2.44.

    Computation depletion amount on ore deposit:

    The depletion amount on ore deposit can be calculated by multiplying the cost per depletion unit with the number of units utilized:

    Depletion = Cost/Unit * Units Utilized

    $2.44*166,200 tones

    =$405,528

    Hence, depletion expenses on ore deposit amounts to $405,528.

    The pass entry to record depreciation charged on mining machine:

    Dr Depletion charge (Ore deposits) 23,268

    Cr Accumulated depreciation 23,268

    Computation of depreciation cost per unit:

    The depletion cost per unit can be calculated by dividing the net cost of the ore with the total units of capacity:

    Depletion/units = Cost - Salvage / Total unit of capacity

    $213,500/1,525,000 tons

    =$0.14

    Hence, depreciation per unit is $0.14.

    Computation of depreciation amount on ore deposit:

    The depletion amount on ore deposit can be calculated by multiplying the cost per depletion unit with the number of units utilized:

    Depletion = Cost/Unit * Units Utilized

    $0.14*166,200 tones

    =$23,268

    Therefore the depreciation expenses on ore deposit amounts to $23,268
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