Sierra Mountain Mining paid $ 827 comma 000 for the right to extract mineral assets from a 550 comma 000-ton deposit. In addition to the purchase price, Sierra also paid a $ 700 filing fee, a $ 2 comma 300 license fee to the state of Nevada, and $ 50 comma 000 for a geological survey of the property. Because Sierra 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, Sierra removed and sold 40 comma 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.

General Journal:

a) Purchase of Minerals:

a) Debit Minerals Asset $827,000

Credit Cash Account $827,000

To record the purchase of the right to extract mineral assets.

b) Debit Minerals Asset $53,000

Credit Cash Account $53,000

To record the payment of filing fee ($700), license fee ($2,300), and geological survey ($50,000) to secure the asset.

c) Debit Depletion Expense $64,000

Credit Accumulated Depletion $64,000

To record depletion expense for the period.

Explanation:

a) Calculation of Depletion Expense

Depletion Rate = Mineral Assets/Mineral Deposit = $880,000/550,000 = $1.6

Depletion Expense for the period = 40,000 x $1.60 = $64,000

b) Depletion Method is a technique for allocating the cost of extracting natural resources such as timber, minerals, and oil from the earth.  Depletion is like depreciation and amortization.  Depletion is used for natural resources, depreciation for tangible non-current assets, while amortization is used for intangibles.  Depletion, like depreciation and amortization, is a non-cash expense that lowers the cost value of an asset incrementally through scheduled charges to income.

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