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28 January, 13:32

Everly Corporation acquires a coal mine at a cost of $400,000. Intangible development costs total $100,000. After extraction has occurred, Everly must restore the property (estimated fair value of the obligation is $80,000), after which it can be sold for $160,000. Everly estimates that 4,000 tons of coal can be extracted.

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  1. C
    28 January, 14:48
    0
    The journal entry is shown below:

    Inventory A/c Dr $73,500

    To Accumulated depletion A/c $73,500

    (Being the depletion is recorded)

    The computation is shown below

    First we have to compute the depletion per ton which is shown below:

    = (Acquired cost of coal mine + Intangible development costs + fair value of the obligation - Sale value) : (Number of estimated tons of coal extracted)

    = ($400,000 + $100,000 + $80,000 - $160,000) : (4,000 tons)

    = $105

    Now if 700 are extracted in first year, so the depletion would be

    = 700 * $105

    = $73,500
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