Question

Everly Corporation acquires a coal mine at a cost of $400,000. Intangible development costs total $100,000. After extraction has occurred, Everly must restore the property (estimated fair value of the obligation is $80,000), after which it can be sold for $160,000. Everly estimates that 4,000 tons of coal can be extracted. If 700 tons are extracted the first year, prepare the journal entry to record depletion.

Answer 1

The journal entry is as follows:

Inventory A/c Dr. $73,500

To accumulated depletion A/c $73,500

(To record depletion)

Workings:

Depreciable cost:

= cost of coal mine + Intangible development cost + estimated fair value of obligation - sale value

= $400,000 + $100,000 + $80,000 - $160,000

= $420,000

Depreciation per ton = Depreciable cost ÷ Tons of coal extracted

= $420,000 ÷ 4,000

= $105

Inventory = Depreciation per ton × tons are extracted the first year

= $105 × 700

= $73,500