Benson Mining Company Purchased a Site Containing a Mineral Deposit

question 48

Essay

Benson Mining Company purchased a site containing a mineral deposit during 2014. The purchase price was $820,000, and the site is estimated to contain 400,000 tons of extractable ore. Benson constructed a building at the site, at a cost of $500,000, to be used while the ore is being extracted. When the ore reserves are gone, the building will have no further value.
Requirements:
A. Explain the objective of recording depletion on natural resources.
B. Determine Benson's depletion rate per ton of ore.
C. Prepare the journal entry to record depletion for the year 2014, when Benson mined and sold 150,000 tons of ore.
D. Prepare the journal entry to record depreciation on the building for 2014 Benson calculates depreciation on the building using the units-of-production method based on the amount of ore extracted (150,000 tons in 2014).

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Definitions:

Net Income

A measure of a company's profitability, calculated as revenue minus expenses, taxes, and costs.

Fixed Assets

Tangible assets expected to be used in business operations for a period longer than one year, such as equipment, real estate, and vehicles.

Full Capacity Sales

Full Capacity Sales represent the maximum sales level a company could achieve utilizing its available capacity without incurring additional capital expenses.

Net Income

Net income, also known as net profit, is the total earnings of a company after subtracting all expenses, taxes, and costs from total revenue; it indicates the financial health and profitability of a business.