Salter Mining Company purchased the Northern Tier Mine for $91 million cash. The mine was estimated to contain 1.88 million tons of ore and to have a residual value of $6.4 million. During the first year of mining operations at the Northern Tier Mine, 60,000 tons of ore were mined, of which 16,000 tons were sold. Prepare a journal entry to record depletion during the year.

Depletion $ 2,000,000 (debit)

Accumulated Depletion $ 2,000,000 (credit)

Explanation:

Salter Mining Company must use the Depletion Unit Method to provide for usage of Mine.

Depletion for the year = (Cost of Asset - Residual Value)/ Expected Total Contents in Units × Number of Units Taken During the Period

Thus Depletion for the year, = (  $91 million-$6.4 million)/ 1,880,000 tons × 60,000 tons

                                                 = $ 84,600,000 / 1,880,000 × 60,000

                                                 = $ 2,000,000

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