On January 1 of 20X1, SFNR, Inc. acquired the right to use 1,000 acres of land in Raton, NM to mine for gold. The lease cost is $50,000, and the related exploration costs on the property were $100,000. Intangible development costs incurred in opening the mine were $900,000 (for this problem, assume all costs were incurred on January 1 and paid for out of the general checking account). SFNR estimates that the mine will provide approximately 100,000 ounces of gold and that it will have a residual value of approximately $50,000.

Instructions

1. Write the journal entry to record the purchase and development costs.
2. Indicate the correct formula to calculate depletion per unit.
3. Calculate depletion for 20X1.
4. Assuming SFNR does not use an accumulated depletion account, create the journal entry to record depletion for the year.
5. At what amount would the Raton gold mine be shown on the balance sheet and where would it be shown?

 

Part 1: Journalize Purchase and Development Costs

		JOURNAL			Page 101
DATE		DESCRIPTION	POST. REF.	DEBIT	CREDIT
20X1
Jan	1	Land Lease		50,000
		Exploration		100,000
		Development		900000
		Checking Account			1050000

Choose from the following options for the journal entry:

Raton gold mine	Current liabilities
Checking account	Equipment
Accounts payable	Land
Current assets	Cost of goods sold
Property, plant, and equipment	Gold inventory

Part 2: Correct formula to calculate depletion per unit

Select from the following options for the calculation:

• Total cost
• Salvage (residual) value
• Total estimated units of production
• Depletion per unit
• Total depletion for the period
• Units extracted
• +  -   /    ×   =

 

Recreate the depletion per unit formula.

Total cost	-	Salvage cost	/total est cost =	Depletion per unit

 

Find depletion per unit.

1050000	-	50000	/100000	10	per unit

Part 3: Calculate depletion for 20X1.

SFNR, Inc. extracts 25,000 ounces of gold from it's Raton, NM gold mine in 20X1. Select from the following options for the calculation:

1. Total cost
2. Salvage (residual) value
3. Total estimated units of production
4. Depletion per unit
5. Total depletion for the period
6. Units extracted
7. +  -   /    ×   =

Create the correct formula for the depletion calculation

Total cost- salvage cost

/

Total est units

=

depletion

 

Use the formula to calculate depletion. 

1050000-50000

/

25000

=

40

Part 4: Journalize Depletion for the Year

Journalize depletion for the year, assuming SFNR does not use an accumulated depletion account.

		JOURNAL			Page 101
DATE		DESCRIPTION	POST. REF.	DEBIT	CREDIT
20X1
Dec	29	Depletion expense		1050000
		Accumulated depreciation

Part 5: Raton Gold Mine on the Balance Sheet

At what amount would the Raton gold mine be shown on the balance sheet and where would it be shown? (Choose from the journal entry list in 1.)

Amount	Balance Sheet Line Item
1050000	PPE

Answer rating: 100% (QA)

Part 1 Journalize Purchase and Development Costs JOURNAL DATE DESCRIPTION POST REF DEBIT CREDIT 20X1 ... View the full answer