Question

Tintin Ltd acquired a mining property in Victoria, called Herge for $18.3 million on 1 July 2016 and treated it as an area of interest. Tintin Ltd incurred the costs as below:

Year	Details	$ Amount
August 2016	Right to explore	500,000
2016 - 2017	Exploratory study and drilling	4,500,000

At the beginning of 2018, the technical feasibility and commercial viability of mining the diamond deposit were confirmed. The company’s experts estimated there were 20 million carats of diamonds that could be commercially exploited. From March 2018 to June 2019, the company undertook the following capital investments:

	Costs	Estimated Life (as at 30 June 2019)
Mine buildings	$5,600,000	20 years
Processing plant	$12,000,000	15 years
Other equipment	$3,000,000	6 years

Mine buildings cannot be economically removed from the mine location, but the processing plant and other equipment can be economically removed and have alternative uses.

On 30 June 2019, Tintin Ltd estimated that the costs of restoration as a result of development and construction activities would be $800,000 at the end of the mine’s life because the company wished to portray itself as a responsible corporate citizen. A discount rate of 8% was identified as relevant for its diamond operation.

Production commenced on 1 July 2019. It will take 9 years to exhaust this economically recoverable reserves, after which time the mining property is expected to have a residual value of $200,000. Activities for the year ended on 30 June 2020 were as follows:

Carats of diamonds mined......................................................................... ….3,000,000

Carats of diamonds sold................................................................................ 2,800,000

Selling price of diamonds.......................................................................... $18 per carat

Production costs (excluding depreciation and amortisation)..................... $20,000,000

Administration expenses.............................................................................. $1,800,000

Selling expenses............................................................................................. $800,000

REQUIRED:

1.Assume all costs incurred during the exploration and evaluation phases were capitalised, what are the amortisation expense and the total depreciation expense for the year ended 30 June 2020? No journal entry is required.

2.What is the cost of goods sold for the year ended 30 June 2020?   

3.What is the finance cost related to the restoration for the year ended 30 June 2020? No journal entry is required.

4.Tintin Ltd incurred stripping costs of $300,000 to remove overburden (e.g., soil, rock, and other materials) during the production phase. Geologists evaluated the overburden removed during this stripping process and suggested the overburden had high ratio of ore to waste. Advise and briefly explain the appropriate accounting treatment relating to the stripping costs. No journal entry is required.         

Answer 1

answer- 1

Cost of exploration and evalution
Right to explore cost	500000
Exploratory study and drilling	4500000
Total cost	5000000
Useful life	10
Amortization-cost	500000

Depreciation	Cost	No of Useful life	Depreciation
Mine building	5600000	20	280000
Processing Plants	12000000	15	800000
other equipements	3000000	6	500000

answer-2

COST OF GOODS SOLD
Carats Mined	54000000
Less:- Closing Stock-	3600000
COST OF GOODS SOLD	50400000

answer-3

FINANCE COST
Cost of restoration at the end of Mine's life	800000

answer-4

Stripping cost is incurred while production activity which is revenue in nature, thus it will be charged to income statement.