Question

Marigold Corporation acquires a coal mine at a cost of $420,000. Intangible development costs total $105,000. After extraction has occurred, Marigold must restore the property (estimated fair value of the obligation is $84,000), after which it can be sold for $168,000. Marigold estimates that 4,200 tons of coal can be extracted.
Required:
If 735 tons are extracted the first year, prepare the journal entry to record depletion.

Answer 1

Answer:

Inventory Dr  $77,175

      To Accumulated depletion  $77,175

(being the depletion is recorded)

Explanation:

The journal entry is shown below:

Inventory Dr  $77,175

      To Accumulated depletion  $77,175

(being the depletion is recorded)

For recording this we debited the inventory as it increased the assets and credited the accumulated depletion as it decreased the assets

The computation is shown below:

=  (Cost of coal mine + intangible development cost + estimated fair value of the obligation - sales value) ÷ (extracted estimated tons) × (extracted tons for the first year)

= ($420,000 + $105,000 + $84,000 - $168,000) ÷ (4,200 tons) × (735 tons)

= $77,175