On May 1, Star Mines Inc. purchased an ore mine for $8,400,000 to access an estimated 4,354,000 tons of ore. The company also incurred development costs of $630,000 related to the mine and purchased equipment for $1,260,000 with a useful life of 15 years and no salvage value. The equipment has alternative uses outside of this mine project. The company is expected to restore the land after mining is complete. The present value of the restoration cost is estimated to be $280,000. The company extracted 504,000 tons of ore during the year and sold 420,000 tons. Hint: For the purchase of this mine, an Asset Retirement Obligation is credited for the present value of restoration costs. Required a. Record the entry for (1) purchase and development costs of the mine and (2) purchase of equipment on May 1. Assume all purchases were for cash. b. Record the entry for (1) depletion of the ore and (2) cost of sale of ore for the year. c. Calculate depreciation expense for the year, assuming that the company applies the straight-line depreciation method, and applies the full-year, end of period convention. a. Date Account Name Dr. Cr. 0 0 x May 1 0 0 x 0 0 x To record purchase of mine. May 1 b. $ To record purchase of mine equipment. Numerator / Denominator = 0x / 0 x Depletion Rate 0 0 x 0 0 x • Note: Use the depletion rate EXACTLY as shown above to calculate depletion below. Date Dec 31 Dec 31 Date Dec 31 Account Name To record depletion of ore. To record cost of sale of ore. Dr. Cr. 0 0 0 x 0 x 0 0 % 0 0 x Account Name Dr. Cr. 0 0 % 0 0 % To record depreciation.
On May 1, Star Mines Inc. purchased an ore mine for $8,400,000 to access an estimated 4,354,000 tons of ore. The company also incurred development costs of $630,000 related to the mine and purchased equipment for $1,260,000 with a useful life of 15 years and no salvage value. The equipment has alternative uses outside of this mine project. The company is expected to restore the land after mining is complete. The present value of the restoration cost is estimated to be $280,000. The company extracted 504,000 tons of ore during the year and sold 420,000 tons. Hint: For the purchase of this mine, an Asset Retirement Obligation is credited for the present value of restoration costs. Required a. Record the entry for (1) purchase and development costs of the mine and (2) purchase of equipment on May 1. Assume all purchases were for cash. b. Record the entry for (1) depletion of the ore and (2) cost of sale of ore for the year. c. Calculate depreciation expense for the year, assuming that the company applies the straight-line depreciation method, and applies the full-year, end of period convention. a. Date Account Name Dr. Cr. 0 0 x May 1 0 0 x 0 0 x To record purchase of mine. May 1 b. $ To record purchase of mine equipment. Numerator / Denominator = 0x / 0 x Depletion Rate 0 0 x 0 0 x • Note: Use the depletion rate EXACTLY as shown above to calculate depletion below. Date Dec 31 Dec 31 Date Dec 31 Account Name To record depletion of ore. To record cost of sale of ore. Dr. Cr. 0 0 0 x 0 x 0 0 % 0 0 x Account Name Dr. Cr. 0 0 % 0 0 % To record depreciation.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:On May 1, Star Mines Inc. purchased an ore mine for $8,400,000 to access an estimated 4,354,000 tons of ore. The
company also incurred development costs of $630,000 related to the mine and purchased equipment for $1,260,000
with a useful life of 15 years and no salvage value. The equipment has alternative uses outside of this mine project.
The company is expected to restore the land after mining is complete. The present value of the restoration cost is
estimated to be $280,000. The company extracted 504,000 tons of ore during the year and sold 420,000 tons. Hint: For
the purchase of this mine, an Asset Retirement Obligation is credited for the present value of restoration costs.
Required
a. Record the entry for (1) purchase and development costs of the mine and (2) purchase of equipment on May 1.
Assume all purchases were for cash.
b. Record the entry for (1) depletion of the ore and (2) cost of sale of ore for the year.
c. Calculate depreciation expense for the year, assuming that the company applies the straight-line depreciation
method, and applies the full-year, end of period convention.
a.
Date
Account Name
Dr.
Cr.
0
0 x
May 1
0
0 x
0
0 x
To record purchase of mine.
May 1
b.
$
To record purchase of mine equipment.
Numerator
/ Denominator =
0x /
0 x
Depletion Rate
0
0 x
0
0 x
• Note: Use the depletion rate EXACTLY as shown above to calculate depletion below.
Date
Dec 31
Dec 31
Date
Dec 31
Account Name
To record depletion of ore.
To record cost of sale of ore.
Dr.
Cr.
0
0
0 x
0 x
0
0 %
0
0 x
Account Name
Dr.
Cr.
0
0 %
0
0 %
To record depreciation.
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