On april 2, 2017, montana mining co. pays $3,721,000 for an ore deposit containing 1,525,000 tons. the company installs machinery in the mine costing $213,500, with an estimated seven-year life and no salvage value. the machinery will be abandoned when the ore is completely mined. montana begins mining on may 1, 2017, and mines and sells 166,200 tons of ore during the remaining eight months of 2017.
Given: April 2, 2017 - paid $3,721,000 for 1,525,000 tons of ore deposit installed machine costing $213,500. 7 year life. No salvage value. will be abandoned when ore deposit is completely mined.
May 1, 2017 - mining begins. 166,200 tons of ore mined and sold.
At the end of the year, depletion of the ore deposit and depreciation of the machinery must be recorded.
3,721,000 / 1,525,000 = 2.44 depletion rate per ton 2.44 * 166,200 = 405,528
entry on Dec. 31: Debit Credit Depletion expense - Mineral deposit 405,528 Accumulated depletion - Mineral deposit 405,528
Depreciation of machine is not computed based on straight line method. It is computed based on the ratio of the ore deposit mined and sold to the total ore deposits.
