Peabody Coal acquired the mineral rights to a tract of land containing coal deposits. Total costs of acquisition, exploration, development were $1,200,000 and an ARO of $300,000 was recorded. The borrowing rate for Peabody is 5%. Peabody estimated the land contained 500,000 tons of coal, and that the land will be sold for $100,000 after the coal is mined. Peabody started extracting coal in 2019. There were 90,000 tons of coal mined in 2019 and 140,000 tons of coal mined in 2020.

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There will be a journal entry necessary for depletion of the coal mine asset.

There is no entry made because the coal is simply moving between asset categories (natural resource to inventory).

While the coal mine value is reduced each year by depletion, the ARO value is increased by accretion.

Accretion is calculated on a straight-line basis using the formula: ARO/# of years of production.

Depletion is calculated on a straight line basis using the formula: Total cost/# years of production.

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Answer is that While the coal mine value is reduced each y... View the full answer