Chapter 8, Problem 34BP

a.

To determine

Prepare the journal entries for Company M.

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:

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 Year 1.

Date	Account title and Explanation	Debit ($)	Credit ($)
January 1,Year 1	Coal Mine	900,000
	Cash		900,000
	( To record purchase of coal mine)

Table (1)

• Coal mine is an asset and there is an increase in the value of asset. Hence, debit it by $900,000.
• Cash is an asset and there is a decrease in the value of asset. Hence, credit it by $900,000.

Date	Account title and Explanation	Debit ($)	Credit ($)
January 7,Year 1	Timber	1,800,000
	Land	200,000
	Cash		2,000,000
	( 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 $1,800,000.
• Land is an asset and there is an increase in the value of asset. Hence, debit it by $200,000.
• Cash is an asset and there is a decrease in the value of asset. Hence, credit it by $2,000,000

2. Prepare journal entry to record depletion on the Year 1.

Date	Account title and Explanation	Debit ($)	Credit ($)
December 31,Year 1	Depletion Expense (2)	240,000
	Coal Mine		240,000
	( To record depletion of coal 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 $240,000.
• Coal mine is an asset and there is a decrease in the value of asset. Hence, credit it by $240,000.

Date	Account title and Explanation	Debit ($)	Credit ($)
Year 1	Depletion Expense (4)	600,000
December 31	Timber		600,000
	( 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 $600,000.
• Timber is an asset and there is a decrease in the value of timber. Hence, credit it by $600,000.

3. Prepare journal entries to record purchases of year 2.

Date	Account title and Explanation	Debit ($)	Credit ($)
January 2,Year 2	Silver Mine	850,000
	Cash		850,000
	( To record purchase of silver mine)

Table (5)

• Silver mine is an asset and there is an increase in the value of asset. Hence, debit it by $850,000.
• Cash is an asset and there is a decrease in the value of asset. Hence, credit it by $850,000.

Date	Account title and Explanation	Debit ($)	Credit ($)
January 8,Year 2	Oil Reserves	875,000
	Cash		875,000
	( 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 $875,000.
• Cash is an asset and there is a decrease in the value of asset. Hence, Credit it by $875,000.

4. Prepare journal entries to record the depletion of natural resources assets:

Date	Account title and Explanation	Debit ($)	Credit ($)
December 31,Year 2	Depletion Expense (5)	204,000
	Coal Mine		204,000
	( To record depletion of coal 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 $204,000.
• Coal mine is an asset and there is a decrease in the value of asset. Hence, credit it by $204,000.

Date	Account title and Explanation	Debit ($)	Credit ($)
December 31,Year 2	Depletion Expense (6)	720,000
	Timber		720,000
	( 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 $720,000.
• Timber is an asset and there is a decrease in the value of timber. Hence, credit it by $720,000.

Date	Account title and Explanation	Debit ($)	Credit ($)
December 31,Year 2	Depletion Expense (8)	254,970
	Silver Mine		254,970
	( To record depletion of silver 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 $254,970.
• Silver mine is an asset and there is a decrease in the value of asset. Hence, credit it by $254,970.

Date	Account title and Explanation	Debit ($)	Credit ($)
December 31,Year 2	Depletion Expense (10)	280,000
	Oil Reserves		280,000
	( 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 $280,000.
• Oil reserves are an asset and there is a decrease in the value of asset. Hence, credit it by $280,000.

Working notes:

Calculate the rate of coal ore per ton:

$\begin{array}{c}\text{Rate}\text{of}\text{coal}\text{ore}\text{per}\text{ton}\text{=}\frac{\text{Purchase}\text{price}\text{of}\text{coal}\text{ore}}{\text{Estimated}\text{yield}\text{of}\text{coal}\text{ore}}\\ \text{=}\frac{\text{\$900,000}}{\text{300,000}\text{tons}}\\ \text{=\$3per}\text{ton}\end{array}$ (1)

Calculate the depletion expense of coal ore mine for Year 1:

$\begin{array}{c}\begin{array}{l}\text{Depletion}\text{Expense}\\ \text{of}\text{coal}\text{ore}\text{mined}\end{array})\text{=Tons}\text{of}\text{coal}\text{ore}\text{mined}\text{×}\text{Rate}\text{per}\text{ton(1)}\\ \text{=80,000tons×\$3}\\ \text{=}\text{\$240,000}\end{array}$ (2)

Calculate the rate of per feet of timber:

$\begin{array}{c}\text{Rate}\text{per feet}\text{=}\frac{\text{Purchase}\text{price}\text{of}\text{land}-\text{Appraisal}\text{of}\text{land}}{\text{Estimated}\text{yield}\text{of}\text{timber}}\\ \text{=}\frac{\text{\$2,000,000}-\text{\$200,000}}{\text{3,000,000feet}}\\ \text{=}\frac{\text{\$1,800,000}}{\text{3,000,000feet}}\\ \text{=}\text{\$0}\text{.60per}\text{feet}\end{array}$ (3)

Calculate the depletion expense of timber for Year 1:

$\begin{array}{c}\begin{array}{l}\text{Depletion}\text{Expense}\\ \text{of}\text{timber}\end{array})\text{=Number}\text{of}\text{board feet}\text{cut}\left(\text{lumber}\right)\text{×}\text{Rate}\text{per}\text{feet(3)}\\ \text{=1,000,000 boards×\$0}\text{.60}\\ \text{=}\text{\$600,000}\end{array}$ (4)

Calculate the depletion expense of coal ore mined for Year 2:

$\begin{array}{c}\begin{array}{l}\text{Depletion}\text{Expense}\\ \text{of coal}\text{ore}\text{mined}\end{array})\text{=Tons}\text{of}\text{coal}\text{ore}\text{extracted}\text{×}\text{Rate}\text{per}\text{ton(1)}\\ \text{=68,000tons×\$3}\\ \text{=}\text{\$204,000}\end{array}$ (5)

Calculate the depletion expense of timber for Year 2:

$\begin{array}{c}\begin{array}{l}\text{Depletion}\text{Expense}\\ \text{of}\text{timber}\end{array})\text{=Number}\text{of}\text{board feet}\text{cut}\left(\text{lumber}\right)\text{×}\text{Rate}\text{per}\text{feet(3)}\\ \text{=1,200,000 boards×\$0}\text{.60}\\ \text{=}\text{\$720,000}\end{array}$ (6)

Calculate the rate of silver mine per ton:

$\begin{array}{c}\text{Rate}\text{of}\text{silver}\text{mine}\text{per}\text{ton}\text{=}\frac{\text{Purchase}\text{price}\text{of}\text{silver}\text{mine}}{\text{Estimated}\text{yield}\text{of}\text{silver}\text{mine}}\\ \text{=}\frac{\text{\$850,000}}{\text{30,000}\text{tons}}\\ \text{=\$28}\text{.33per}\text{ton}\end{array}$ (7)

Calculate the depletion expense of silver mine for Year 2:

$\begin{array}{c}\begin{array}{l}\text{Depletion}\text{Expense}\\ \text{of}\text{silver}\text{ore}\end{array})\text{=Tons}\text{of}\text{silver}\text{ore}\text{extracted}\text{×}\text{Rate}\text{per}\text{ton(7)}\\ \text{=}9\text{,000}\text{tons×\$28}\text{.33}\\ \text{=}\text{\$254,970}\end{array}$ (8)

Calculate the rate of oil per barrel:

$\begin{array}{c}\text{Rate}\text{of}\text{oil}\text{per}\text{barrel}\text{=}\frac{\text{Purchase}\text{price}\text{of}\text{oil}\text{reserves}}{\text{Number}\text{of}\text{oil}\text{barrels}\text{extracted}-\text{Unprofitable barrels}}\\ \text{=}\frac{\text{\$875,000}}{\text{270,000}\text{barrels}-20,000\text{barrels}}\\ \text{=\$3}\text{.50 per}\text{barrel}\end{array}$ (9)

Calculate the depletion expense of oil reserves for Year 2:

$\begin{array}{c}\begin{array}{l}\text{Depletion}\text{Expense}\\ \text{of}\text{oil}\text{reserves}\end{array})\text{=Barrels of oil reserves}\text{extracted}\text{×}\text{Rate}\text{per}\text{barrel(9)}\\ \text{=}8\text{0,000}\text{barrels}\text{×}\text{\$3}\text{.50}\\ \text{=}\text{\$280,000}\end{array}$ (10)

b.

To determine

Prepare the portion of the balance sheet that reports natural resources.

Explanation of Solution

Prepare partial balance sheet that reports natural resources.

Company P
Partial Balance Sheet
For the year ended December 31, Year 2
Natural Resources	Amount ($)
Coal Mine	(11) 456,000
Timber	(12) 480,000
Silver Mine	(13) 595,030
Oil Reserves	(14) 595,000
Total Natural Resources	2,126,000
Land	200,000
Total	2,326,030

Table (11)

Working notes:

Calculate the book value of coal mine:

$\begin{array}{c}\text{Book}\text{value}\text{of}\text{coal}\text{mine}\text{=}\left(\begin{array}{l}\text{Purchase}\text{price}\text{of}\text{coal}\text{mine}-\text{Depletion}\text{expense}\text{of}\text{year}\text{1}\\ -\text{Depletion}\text{expense}\text{of}\text{Year}\text{2}\end{array}\right)\\ \text{=\$900,000}-\text{\$240,000}-\text{\$204,000}\\ \text{=\$456,000}\end{array}$ (11)

Calculate the book value of Timber:

$\begin{array}{c}\text{Book}\text{value}\text{of}\text{Timber}\text{=}\left(\begin{array}{l}\text{Purchase}\text{price}\text{of}\text{timber}-\text{Depletion}\text{expense}\text{of}\text{year}\text{1}\\ -\text{Depletion}\text{expense}\text{of}\text{Year}\text{2}\end{array}\right)\\ \text{=\$1,800,000}-\text{\$600,000}-\text{\$720,000}\\ \text{=\$480,000}\end{array}$ (12)

Calculate the book value of silver mine:

$\begin{array}{c}\text{Book}\text{value}\text{of}\text{silver}\text{mine}\text{=}\left(\begin{array}{l}\text{Purchase}\text{price}\text{of}\text{silver}\text{mine}-\\ -\text{Depletion}\text{expense}\text{of}\text{Year}\text{2}\end{array}\right)\\ \text{=\$850,000}-\text{\$254,970}\\ \text{=\$595,030}\end{array}$ (13)

Calculate the book value of Oil Reserves:

$\begin{array}{c}\text{Book}\text{value}\text{of}\text{oil}\text{reserves}\text{=}\left(\begin{array}{l}\text{Purchase}\text{price}\text{of}\text{oil}\text{reserves}-\\ -\text{Depletion}\text{expense}\text{of}\text{Year}\text{2}\end{array}\right)\\ \text{=\$875,000}-\text{\$280,000}\\ \text{=\$595,000}\end{array}$ (14)

c.

To determine

Prepare the depletion journal entry for Year 3.

Explanation of Solution

Prepare journal entry:

Date	Account title and Explanation	Debit ($)	Credit ($)
Year 3	Depletion Expense (17)	364,800
	coal Mine		364,800
	( To record depletion of coal 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 $364,800.
• Coal mine is an asset and there is a decrease in the value of asset. Hence, credit it by $364,800.

Working notes:

Calculate the undepleted cost of coal mine for Year 3:

$\begin{array}{c}\begin{array}{l}\text{Undepleted}\text{cost}\text{of}\text{coal}\\ \text{mine}\text{at}\text{the}\text{beginning}\text{of}\text{year3}\end{array})\text{=}\left(\begin{array}{l}\text{Purchase}\text{price}\text{of}\text{coal}\text{mine}-\\ \text{Depletion}\text{expense}\text{of}\text{year}\text{1}-\\ \text{Depletion}\text{expense}\text{of}\text{year}\text{2}\end{array}\right)\\ \text{=\$900,000}-\text{\$240,000}-\text{\$204,000}\\ \text{=\$456,000}\end{array}$ (15)

Calculate the rate of coal mine per ton:

$\begin{array}{c}\text{Rate}\text{of}\text{coal}\text{mine}\text{per}\text{ton}\text{=}\frac{\text{Undepleted}\text{cost}\text{of}\text{coal}\text{mine}}{\text{Tons}\text{of}\text{coal}\text{ore}\text{remaining}}\\ \text{=}\frac{\text{\$456,000}}{\text{50,000}\text{tons}}\\ \text{=\$9}\text{.12per}\text{ton}\end{array}$ (16)

Calculate the depletion expense of coal mine for Year 3:

$\begin{array}{c}\begin{array}{l}\text{Depletion}\text{Expense}\\ \text{of}\text{coal}\text{ore}\end{array})\text{=Tons}\text{of}\text{coal}\text{ore}\text{extracted}\text{×}\text{Rate}\text{per}\text{ton(16)}\\ \text{=}40\text{,000}\text{tons×\$9}\text{.12}\\ \text{=}\text{\$364,800}\end{array}$ (17)