E9-24 (similar to) Sierra Mountain Mining paid $ 598 comma 100 for the right to extract mineral assets from a 450 comma 000 -ton deposit. In addition to the purchase price, Sierra also paid a $ 300 filing fee, a $ 1 comma 600 license fee to the state of Nevada, and $ 75 comma 000 for a geological survey of the property. Because Sierra purchased the rights to the minerals only and did not purchase the land, it expects the asset to have zero residual value. During the first year, Sierra removed and sold 50 comma 000 tons of the minerals. Make journal entries to record (a) purchase of the minerals (debit Minerals), (b) payment of fees and other costs, and (c) depletion for the first year.

Journal Entry for the purchase of rights to extract mineral assets:

According to the International Accounting Standard 16 Property, Plant & Equipment, if the useful life of the asset is more than one year then it must be capitalized. Furthermore, the standard also states that the expenditures like Filing fee and Licenses and Geological surveys that are required to bring the asset into working condition must be capitalized as part of Non-current Asset.

(a) Purchase of the minerals

Dr Minerals Right $598,100 (Increase in Non current asset)

Cr Bank $598,100 (Decrease in Current Assets)

(b) Payment of fees and other costs

Journal Entry for the Filing and License fee (must be capitalized according to IAS 16):

Dr Minerals Right $1900

Cr Bank $1900

Journal Entry for the Geological surveys (must be capitalized according to IAS 16):

Dr Minerals Right $75,000

Cr Bank $75,000

(c) Depletion for the first year

Total Minerals Rights Capitalized=$598,000+$1,900+$75,000 = $674,900

Depletion for the year = Capitalized cost * Mineral sold / Total deposit of Mineral

Depletion for the year = $674,900 * 50/450 = $74,988 for the year

Journal Entry for the Depletion for the first year (The NCAs must be depreciated on fair basis, according to IAS 16):

Dr Depreciation $74,988

Cr Accumulated Depreciation $74,988