Flannery Company engages in the exploration and development of many types of natural resources. In the last two years, the company has engaged in the following activities:

Flannery Company engages in the exploration and development of many types of natural resources. In the last two years, the company has engaged in the following activities:

Jan. 1, 2016	Purchased for $200,000 a silver mine estimated to contain 816,000 tons of silver ore.
July 1, 2016	Purchased for $2,000,000 cash a tract of land containing timber estimated to yield 2,950,000 board feet of lumber. At the time of purchase the land was estimated at $182,000.
Feb. 1, 2017	Purchased for $786,000 a gold mine estimated to yield 29,100 tons of goldveined ore.
Sept. 1, 2017	Purchased oil reserves for $705,000. The reserves were estimated to contain 260,000 barrels of oil, of which 24,000 would be unprofitable to pump.

Required:

a.	Prepare the journal entries to account for the following:
	(1)	The 2016 purchases.
	(2}	Depletion on the 2016 purchases, assuming that 71,000 tons of silver were mined and 986,000 board feet of lumber were cut.
	(3)	The 2017 purchases.
	(4)	Depletion on the four natural resource assets, assuming that 62,000 tons of silver ore, 1,255,000 board feet of lumber, 8,800 tons of gold ore, and 82,000 barrels of oil were extracted.

Prepare the portion of the December 31, 2017, balance sheet that reports natural resources.

Assume that in 2018 the estimates changed to reflect only 49,580 tons of gold ore remaining. Prepare the depletion journal entry for 2018 to account for the extraction of 34,706 tons of gold ore
 

Explanation:

a.

2016

Depletion expense:

(71,000 × $.25) = $17,750

(986,000 × $.62) = $611,320

2017

Depletion expense:

(62,000 × $.25) = $15,500

(1,255,000 × $.62) = $778,100

(8,800 × $27.01) = $237,688

(82,000 × $2.99) = $245,180

Computations:

Silver Mine depletion: $200,000 ÷816,000 = $.25 per ton

Timber depletion: ($2,000,000 – $182,000) ÷ 2,950,000 = $.62 per board foot.

Gold Mine depletion: $786,000 ÷ 29,100 = $27.01 per ton

Oil Reserves depletion: $705,000 ÷ (260,000 − 24,000) (profitable) = $2.99 per barrel

b.

Silver mine (less depletion): $200,000 − $17,750 − $15,500 = $166,750

Timber (less depletion): $1,818,000 − $611,320 − $778,100 = $428,580

Gold mine (less depletion): $786,000 − $237,688 = $548,312

Oil reserves (less depletion): $705,000 − $245,180 = $459,820

c.

Gold mine undepleted cost at 1/2018: $548,312

Revised estimated tons of gold ore: 49,580

Revised depletion rate per ton: $548,312 ÷ 49,580 = $11.06 per ton

2018 depletion: $11.06 × 34,706 = $383,848
Thanks