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Chapter 11: Q11-9BE (page 594)

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.

Short Answer

Expert verified

Answer

Inventory = $73,500

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Depletion

Depletion is defined as a reduction in the quantity of a production factor due to the manufacturing process. Companies generate new products by combining current goods and services. When old items are turned into new products, it is termed a production process.

02

Preparing journal entry

Date

Particular

Debit ($)

Credit ($)

Inventory

73,500

Coal Mine

73,500

Working notes:

Calculating inventory per ton value

Inventory per ton=Cost of coal mine+Development cost+Estimated fair value−Sales valueTotal estimated coal=$400,000+$100,000+$80,000−$160,0004,000=$105 per ton

Calculating the value of inventory

Inventory=Total coal extracted×Value per ton=700×$105=$73,500

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Most popular questions from this chapter

(Error Analysis and Depreciation, SL and SYD) Mike Devereaux Company shows the following entries in its Equipment account for 2018. All amounts are based on historical cost.

Equipment
2018
2018
Jan 1Balance 134,750June 30Cost of 23,000 equipment sold (purchased prior to 2018)
Aug. 10Purchases 32,000

12Freight on Equipment purchased 700

25Installation costs 2,700

Nov. 10Repairs 500

Instructions

  1. Prepare any correcting entries necessary.
  2. Assuming that depreciation is to be charged for a full year on the ending balance in the asset account, compute the proper depreciation charge for 2018 under each of the methods listed below. Assume an estimated life of 10 years, with no salvage value. The machinery included in the January 1, 2018, balance was purchased in 2016.

    a. Straight-line
    b. Sum-of-the-years’-digits.

Workman Company purchased a machine on January 2, 2017, for \(800,000. The machine has an estimated useful life of 5 years and a salvage value of \)100,000. Depreciation was computed by the 150% declining-balance method. What is the amount of accumulated depreciation at the end of December 31, 2018?

(Depletion Computations—Timber) Stanislaw Timber Company owns 9,000 acres of timberland purchased in 2006 at a cost of \(1,400 per acre. At the time of purchase, the land without the timber was valued at \)400 per acre. In 2007, Stanislaw built fire lanes and roads, with a life of 30 years, at a cost of \(84,000. Every year, Stanislaw sprays to prevent disease at a cost of \)3,000 per year and spends \(7,000 to maintain the fire lanes and roads. During 2008, Stanislaw selectively logged and sold 700,000 board feet of timber of the estimated 3,500,000 board feet. In 2009, Stanislaw planted new seedlings to replace the trees cut at a cost of \)100,000.

Instructions

  1. Determine the depreciation expense and the cost of timber sold related to depletion for 2008.
  2. Stanislaw has not logged since 2008. If Stanislaw logged and sold 900,000 board feet of timber in 2019, when the timber cruise (appraiser) estimated 5,000,000 board feet, determine the cost of timber sold related to depletion for 2019.

Dickinson Inc. owns the following assets.

Asset

Cost

Salvage

Estimated useful life

A

\(70,000

\)7,000

10 years

B

50,000

5,000

5 years

C

82,000

4,000

12 years

Compute the composite depreciation rate and the composite life of Dickinson’s assets.

Brazil Group purchases a vehicle at a cost of \(50,000 on January 2, 2017. Individual components of the vehicle and useful lives are as follows.

Cost

Useful Lives

Tires

\) 6,000

2 years

Transmission

10,000

5 years

Trucks

34,000

10 years

Instructions

(Assume no residual (salvage) value.)

  1. Compute depreciation expense for 2017, assuming Brazil depreciates the vehicle as a single unit.
  2. Compute depreciation expense for 2017, assuming Brazil uses component depreciation.
  3. Why might a company want to use component depreciation to depreciate its assets?
See all solutions

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