The Hollister Company acquires a silver mine at the cost of $1,600,000 on January 1. Along with the purchase price Hollister pays additional costs associated with development of $50,000. Hollister expects the mine will have a salvage value of $175,000 once all the silver has been mined. Best estimates are that the mine contains 250,000 tons of ore. a. Prepare the entry to record the purchase of the silver mine.
b. Prepare the December 31 year-end adjusting entry to record depletion is 60,000 tons of ore are mined and all the ore is sold.
c. Prepare the December 31 year-end adjusting entry to record depletion is 60,000 tons of ore are mined but only 15,000 tons of the ore are sold.

Part a

Debit : Silver Mine $1,650,000

Credit : Cash   $1,650,000

Part b

Debit : Depletion expense $354,000

Credit : Accumulated depletion $354,000

Part c

Debit : Depletion expense $354,000

Credit : Accumulated depletion $354,000

Explanation:

Step 1 : Cost of the Silver Mine

Purchase Price        $1,600,000

Development Costs    $50,000

Total Cost                $1,650,000

Step 2 : Depletion rate

Depletion rate = (Cost - Salvage value) ÷ Estimate Usage

                        = $5.90

Step 3 : Depletion expense

Note : Depletion expense depends on units mined only instead of units sold.

Depletion expense = Depletion rate x Units mined

if 60,000 tons of ore are mined and sold :

Depletion expense = $354,000

if 60,000 tons of ore are mined but only 15,000 tons of the ore are sold :

Depletion expense = $354,000

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