Question

On July 23 of the current year, Dakota Mining Co. pays $6,110,400 for land estimated to contain 8,040,000 tons of recoverable ore. It installs machinery costing $723,600 that has a 10-year life and no salvage value and is capable of mining the ore deposit in eight years. The machinery is paid for on July 25, seven days before mining operations begin. The company removes and sells 414,250 tons of ore during its first five months of operations ending on December 31. Depreciation of the machinery is in proportion to the mine's depletion as the machinery will be abandoned after the ore is mined.

Required:
Prepare entries to record:

a. the purchase of the land
b. the cost and installation of machinery
c. the first five months' depletion assuming the land has a net salvage value of zero after the ore is mined.
d. the first five months' depreciation on the machinery.

Answer 1

Answer:

a.Purchase of Land

Land $6,110,400 (debit)

Cash $6,110,400 (credit)

b.Machinery Costs

Land $723,600 (debit)

Accounts Payable $723,600 (credit)

c. $314,830

d. $37,282.50

Explanation:

Purchase of Land

Land $6,110,400 (debit)

Cash $6,110,400 (credit)

Machinery Costs

Land $723,600 (debit)

Accounts Payable $723,600 (credit)

Depletion Expense = Cost of Asset / Expected Total Contents in Units × Number of Units taken in the Period.

                                = $6,110,400 / 8,040,000 tons × 414,250 tons

                                = $314,830

Depreciation Expense = Cost of Asset / Expected Total Contents in Units × Number of Units taken in the Period.

                                     = $723,600 / 8,040,000 tons × 414,250 tons

                                     = $37,282.50