What is process in calculating depletion of mine?

Solution

The solution is given below −

Cost = (175000 + 45000 – 0)/95000

       = $ 2.32 per ton

Depletion of mine = $ 2.32 * 60000

       = $ 139200

Depletion expenses = total depletion of mine – depletion (unsold)

       = 139200 – (2.32 * 15000)

       = $ 104400

b) Calculate depletion expenses and prepare a journal entry for the following.

A company purchases an oil field for $ 2.5 mm and estimated 8,00,000 gallons of oil reserves. Cost allocated per gallon is $ 2.75. In the first year, they extracted 1,80,000 gallons of oil and sells it to buyers.

Case -1

Depletion expenses = number of units consumed * depletion value per unit

       = 180000 * 2.75

       = $ 495000 (0.495 mm)

Journal entry

Case – 2

In the above example with an inventory of 30,000 of yearend inventory.

Inventory cost = 30000 * 2.75 => 82500

Journal entry