a.
Prepare the journal entries for Company P.
a.
Explanation of Solution
Depletion:
Depletion is a concept which is same as depreciation. It is the allocation of cost of natural resources to expense over resource’s the useful time in a systematic and normal manner.
Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Accounting rules for Journal entries:
- To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
- To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.
1. Prepare journal entry to record purchases of 2016.
Date | Account title and Explanation | Debit ($) | Credit ($) |
January 1,2016 | Silver Mine | 1,500,000 | |
Cash | 1,500,000 | ||
( To record purchase of silver mine) |
Table (1)
- Silver mine is an asset and there is an increase in the value of asset. Hence, debit it by $1,500,000.
- Cash is an asset and there is a decrease in the value of asset. Hence, credit it by $1,500,000.
Date | Account title and Explanation | Debit ($) | Credit ($) |
January 7,2016 | Timber | 1,600,000 | |
Land | 100,000 | ||
Cash | 1,700,000 | ||
( To record purchase of timber) |
Table (2)
- Timber is an asset and there is an increase in the value of asset. Hence, debit it by $1,600,000.
- Land is an asset and there is an increase in the value of asset. Hence, debit it by $100,000.
- Cash is an asset and there is a decrease in the value of asset. Hence, credit it by $1,700,000
2. Prepare journal entry to record depletion on the 2016.
Date | Account title and Explanation | Debit ($) | Credit ($) |
December 31,2016 | Depletion Expense (2) | 210,000 | |
Silver Mine | 210,000 | ||
( To record depletion of silver mine) |
Table (3)
- Depletion Expense is a component of
stockholders’ equity and there is a decrease in the value of stockholders’ equity. Hence, debit it by $210,000. - Silver mine is an asset and there is a decrease in the value of asset. Hence, credit it by $210,000.
Date | Account title and Explanation | Debit ($) | Credit ($) |
December 31,2016 | Depletion Expense (4) | 800,000 | |
Timber | 800,000 | ||
( To record depletion of timber) |
Table (4)
- Depletion Expense is a component of stockholders’ equity and there is a decrease in the value of stockholders’ equity. Hence, debit it by $800,000.
- Timber is an asset and there is a decrease in the value of timber. Hence, credit it by $800,000.
3. Prepare journal entries to record purchases of 2017.
Date | Account title and Explanation | Debit ($) | Credit ($) |
January 2,2017 | Gold Mine | 2,700,000 | |
Cash | 2,700,000 | ||
( To record purchase of gold mine) |
Table (5)
- Gold mine is an asset and there is an increase in the value of asset. Hence, debit it by $2,700,000.
- Cash is an asset and there is a decrease in the value of asset. Hence, credit it by $2,700,000.
Date | Account title and Explanation | Debit ($) | Credit ($) |
January 9,2017 | Oil Reserves | 1,300,000 | |
Cash | 1,300,000 | ||
( To record purchase of oil reserves) |
Table (6)
- Oil reserves are an asset and there is an increase in the value of asset. Hence, debit it by $1,300,000.
- Cash is an asset and there is an decrease in the value of asset. Hence, Credit it by $1,300,000.
4. Prepare journal entries to record the depletion of natural resources assets:
Date | Account title and Explanation | Debit ($) | Credit ($) |
December 31,2017 | Depletion Expense (5) | 300,000 | |
Silver Mine | 300,000 | ||
( To record depletion of silver mine) |
Table (7)
- Depletion Expense is a component of stockholders’ equity and there is a decrease in the value of stockholders’ equity. Hence, debit it by $300,000.
- Silver mine is an asset and there is a decrease in the value of asset. Hence, credit it by $300,000.
Date | Account title and Explanation | Debit ($) | Credit ($) |
December 31,2017 | Depletion Expense (6) | 480,000 | |
Timber | 480,000 | ||
( To record depletion of timber) |
Table (8)
- Depletion Expense is a component of stockholders’ equity and there is a decrease in the value of stockholders’ equity. Hence, debit it by $480,000.
- Timber is an asset and there is a decrease in the value of timber. Hence, credit it by $480,000.
Date | Account title and Explanation | Debit ($) | Credit ($) |
December 31,2017 | Depletion Expense (8) | 216,000 | |
Gold Mine | 216,000 | ||
( To record depletion of gold mine) |
Table (9)
- Depletion Expense is a component of stockholders’ equity and there is a decrease in the value of stockholders’ equity. Hence, debit it by $216,000.
- Gold mine is an asset and there is a decrease in the value of asset. Hence, credit it by $216,000.
Date | Account title and Explanation | Debit ($) | Credit ($) |
December 31,2017 | Depletion Expense (10) | 250,000 | |
Oil Reserves | 250,000 | ||
( To record depletion of oil reserves) |
Table (10)
- Depletion Expense is a component of stockholders’ equity and there is a decrease in the value of stockholders’ equity. Hence, debit it by $250,000.
- Oil reserves are an asset and there is a decrease in the value of asset. Hence, credit it by $250,000.
Working notes:
Calculate the rate of silver ore per ton:
Calculate the depletion expense of silver ore mine for 2016:
Calculate the rate per board feet of timber:
Calculate the depletion expense of timber for 2016:
Calculate the depletion expense of silver ore mined for 2017:
Calculate the depletion expense of timber for 2017:
Calculate the rate of gold mine per ton:
Calculate the depletion expense of gold mine for 2017:
Calculate the rate of oil per barrel:
Calculate the depletion expense of oil reserves for 2017:
b.
Prepare the portion of the balance sheet that reports natural resources.
b.
Explanation of Solution
Prepare partial balance sheet that reports natural resources.
Company P | |
Partial Balance Sheet | |
For the year ended December 31, 2017 | |
Natural Resources | Amount ($) |
Silver Mine | (11) 990,000 |
Timber | (12) 320,000 |
Gold Mine | (13) 2,484,000 |
Oil Reserves | (14) 1,050,000 |
Total Natural Resources | 4,844,000 |
Land | 100,000 |
Total | 4,944,000 |
Table (11)
Working notes:
Calculate the Book value of silver mine:
Calculate the Book value of Timber:
Calculate the Book value of Gold mine:
Calculate the book value of Oil Reserves:
c.
Prepare the depletion journal entry for 2018.
c.
Explanation of Solution
Prepare journal entry:
Date | Account title and Explanation | Debit ($) | Credit ($) |
2018 | Depletion Expense (17) | 1,242,000 | |
Gold Mine | 1,242,000 | ||
( To record depletion of gold mine) |
Table (12)
- Depletion Expense is a component of stockholders’ equity and there is a decrease in the value of stockholders’ equity. Hence, debit it by $1,242,000.
- Gold mine is an asset and there is a decrease in the value of asset. Hence, credit it by $1,242,000.
Working notes:
Calculate the undepleted cost of gold mine for at the beginning of 2018:
Calculate the rate of gold mine per ton:
Calculate the depletion expense of gold mine for 2018:
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