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What is process in calculating depletion of mine?
Solution
The solution is given below −
Cost = (175000 + 45000 – 0)/95000
= $ 2.32 per ton
Depletion of mine = $ 2.32 * 60000
= $ 139200
Depletion expenses = total depletion of mine – depletion (unsold)
= 139200 – (2.32 * 15000)
= $ 104400
b) Calculate depletion expenses and prepare a journal entry for the following.
A company purchases an oil field for $ 2.5 mm and estimated 8,00,000 gallons of oil reserves. Cost allocated per gallon is $ 2.75. In the first year, they extracted 1,80,000 gallons of oil and sells it to buyers.
Case -1
Depletion expenses = number of units consumed * depletion value per unit
= 180000 * 2.75
= $ 495000 (0.495 mm)
Journal entry
| Particulars | Debit ($) | Credit ($) |
|---|---|---|
| Depletion expenses | 495000 | |
| Accumulated expenses | 495000 |
Case – 2
In the above example with an inventory of 30,000 of yearend inventory.
Inventory cost = 30000 * 2.75 => 82500
Journal entry
| Particulars | Debit ($) | Credit ($) |
|---|---|---|
| Depletion expenses | 412500 | |
| Inventory | 82500 | |
| Accumulated expenses | 495000 |
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