SierraSierra Mountain Mining paid $ 582 comma 400$582,400 for the right to extra

Question

SierraSierra Mountain Mining paid $ 582 comma 400$582,400 for the right to extract mineral assets from a 350 comma 000350,000-ton deposit. In addition to the purchase price, SierraSierra also paid a $ 1 comma 000$1,000 filing fee, a $ 1 comma 600$1,600 license fee to the state of Nevada, and $ 80 comma 000$80,000 for a geological survey of the property. Because SierraSierra purchased the rights to the minerals only and did not purchase the land, it expects the asset to have zero residual value. During the first year, SierraSierra removed and sold 40 comma 00040,000 tons of the minerals. Make journal entries to record (a) purchase of the minerals (debit Minerals), (b) payment of fees and other costs, and (c) depletion for the first year

Explanation / Answer

Cost of Mining rights purchased $582,400

Other expense paid for purchasing mining rights (1000+1600+80000) = $ 82,600

Total cost of mining rights ( 582,000+82,600) = $ 665,000

Expected tonnes extracted = 350,000 tonnes

Salvage value = Nil

Tonnes extracted during the year =40,000 tonnes

Depletion expense per tonne = cost - salvage value / total expected tonnes extracted =665,000-0 /350,000 = 1.90 per tonne

Depletion expense for the year (40,000 tonnes@1.90) = $76,000

The journal entries as follows:

For Purchase Rights Minerals Account Dr. 582,400 Cash account Cr. 582,400 For expense paid on purchase of rights Minerals Account Dr. 82,600 Cash account Cr. 82,600 For depletion expense charged Depletion expense Dr. 76,000 Accumulated Depletion-Minerals Cr. 76,000

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