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    Depletion of the Mine at Salter Mining Company

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    Salter Mining Company purchased the Northern Tier Mine for $21 million cash. The mine was estimated to contain 2.5 million tons of ore and to have a residual value of $1 million.
    During the first year of mining operations at the Northern Tier Mine, 50,000 tons of ore were mined, of which 40,000 tons were sold.

    a) Prepare a journal entry to record depletion during the year.
    b) Show how the Northern Tier Mine and its accumulated depletion would appear in Salter Mining Company's balance sheet after the first year of operations.
    c) Will the entire amount of depletion computed in part a) be deducted from revenue in the determination of income for the year? Explain.
    d) Indicate how the journal entry in part a) affects the company's current ratio (its current assets divided by its liabilities). Do you believe that the activities summarized in this entry do, in fact, make the company any more or less liquid? Explain.

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    Solution Preview

    a) Prepare a journal entry to record depletion during the year.

    Depletion of Mine per ton:

    Cost - salvage / useful life = depletion per ton

    $21 million - residual of $1million = $8 per ton
    2.5 million tons

    Year one: 50,000 x $8 per ton = $400,000 depletion
    40,000 x $8 = 320,000 COGS

    DEBIT: Inventory $80,000
    DEBIT: Cost of goods sold $320,000
    CREDIT: ...

    Solution Summary

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