Computing and Recording Depletion Expense In 2019, Eldenburg Mining Company purchased land for $7,200,000 that had a natural resource reserve estimated to be 500,000 tons. Development and road construction costs on the land were $420,000, and a building was constructed at a cost of $50,000. When the natural resources are completely extracted, the land has an estimated residual value of $1,200,000. In addition, the cost to restore the property to comply with environmental regulations is estimated to be $800,000. Production in 2016 and 2017 was 60,000 tons and 85,000 tons, respectively. Required:
a. Compute the depletion charge for 2016 and 2017. (You should include depreciation on the building, if any, as part of the depletion charge.)
b. Prepare a journal entry to record each year's depletion expense as determined in part a.

A. 2016$872,400

2017$1,235,900

B. 2016

Dr depletion expense a/c872,400

Cr Accumulated depletion expense a/c 872,400

2017

Dr Depletion expense a/c1,235,900

Cr Accumulated depletion expense a/c 1,235,900

Explanation:

a. Computation for the depletion charge for 2016 and 2017

First step is to calculate the value of the mine

Land purchase price7,200,000

development costs420,000

building cost50,000

restoration cost800,000

less: residual value of land(1,200,000)

Value of the mine$7,270,000

Second step is to calculate the annual depletion rate

Annual depletion rate = $7,270,000 / 500,000 tons

Annual depletion rate=$14.54 per ton.

Now let calculate the depletion charge for 2016 and 2017.

2016 depletion charge=$14.54*60,000 tons

2016 depletion charge=$872,400.

2017 depletion charge°$14.54*85,000 tons

2017 depletion charge=$1,235,900..

b. Preparation of the journal entry to record each year's depletion expense as determined in part a.

2016

Dr depletion expense a/c872,400

Cr Accumulated depletion expense a/c 872,400

2017

Dr Depletion expense a/c1,235,900

Cr Accumulated depletion expense a/c 1,235,900

Alternative journal entries:

2016

Dr Inventory872,400

Cr Resource reserve 872,400

2017

Dr Inventory 1,235,900

Cr Resource reserve 1,235,900

it should be