Recording Entries Related to the Purchase and Depletion of Natural Resources

On May 1, Star Mines Inc. purchased an ore mine for $7,200,000 to access an estimated 3,732,000 tons of ore. The company also incurred development costs of $540,000 related to the mine and purchased equipment for $1,080,000 with a useful life of 15 years and no salvage value. The equipment has alternative uses outside of this mine project. The company is expected to restore the land after mining is complete. The present value of the restoration cost is estimated to be $240,000. The company extracted 432,000 tons of ore during the year and sold 360,000 tons. Hint: For the purchase of this mine, an Asset Retirement Obligation is credited for the present value of restoration costs.

Required a. Record the entry for (1) purchase and development costs of the mine and (2) purchase of equipment on May 1. Assume all purchases were for cash. b. Record the entry for (1) depletion of the ore and (2) cost of sale of ore for the year. c. Calculate depreciation expense for the year, assuming that the company applies the straight-line depreciation method.

- Note: Use the depletion rate EXACTLY as shown above to calculate depletion below