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Fortune Drilling Company acquires a mineral deposit at a cost of $5,900,000. It incurs additional costs of $600,000 to access the deposit, which is estimated to contain 2,000,000 tons and is expected to take 5 years to extract. What journal entry would be needed to record the expense for the first year assuming 418,000 tons were mined?

a. Debit Depletion Expense $1,233,100; credit Accumulated Depletion $1,233,100.
b. Debit Amortization Expense $1,358,500; credit Accumulated Amortization $1,358,500.
c. Debit Depreciation Expense $1,358,500; credit Accumulated Depreciation $1,358,500.
c. Debit Depletion Expense $1,358,500; credit Accumulated Depletion $1,358,500.
d. Debit Depreciation Expense $1,233,100; credit Accumulated Depreciation $1,233,100.

Answer :

Answer:

Option C is the correct answer.

Debit Depletion Expense $1,358,500; credit Accumulated Depletion $1,358,500.

Explanation:

Fortune Drilling Company acquires a mineral deposit at a cost of $5,900,000. It incurs additional costs of $600,000 to access the deposit, which is estimated to contain 2,000,000 tons and is expected to take 5 years to extract. Compute the depletion expense for the first year assuming 418,000 tons were mined.

Depletion expense = ( Mineral Deposit Cost + Additional cost)/ Estimate Extraction * N0 of ton extracted in first year

Depletion expense = (5900000 + 600000)/2000000 * 418000

Depletion expense = $ 1,358,500

The journal entry for recording the expense should be option c.

Debit Depletion Expense $1,358,500; credit Accumulated Depletion $1,358,500.

Journal entry:

Depletion Expense $1,358,500

            To Accumulate depletion $1,358,500

(being an expense is recorded)

here the expense is debited as it increased the assets and accumulated depletion should be credited as it decreased the assets.

Working note:

Depletion expense = ( Mineral Deposit Cost + Additional cost)/ Estimate Extraction * N0 of ton extracted in first year

= (5900000 + 600000)/2000000 * 418000

=  $ 1,358,500

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