Question

On May 1, 2018, Hecala Mining entered into an agreement with the state of New Mexico to obtain the rights to operate a mineral mine in New Mexico for $10.3 million. Additional costs and purchases included the following (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):

Development costs in preparing the mine	$	3,500,000
Mining equipment		167,700
Construction of various structures on site		83,000

After the minerals are removed from the mine, the equipment will be sold for an estimated residual value of $10,000. The structures will be torn down.

Geologists estimate that 830,000 tons of ore can be extracted from the mine. After the ore is removed the land will revert back to the state of New Mexico.

The contract with the state requires Hecala to restore the land to its original condition after mining operations are completed in approximately four years. Management has provided the following possible outflows for the restoration costs:

Cash Outflow				Probability
$	630,000			30%
	730,000			30%
	830,000			40%

Hecala’s credit-adjusted risk-free interest rate is 8%. During 2018, Hecala extracted 123,000 tons of ore from the mine. The company’s fiscal year ends on December 31.

Required:

1. Determine the amount at which Hecala will record the mine.
2. Calculate the depletion of the mine and the depreciation of the mining facilities and equipment for 2018, assuming that Hecala uses the units-of-production method for both depreciation and depletion.
3. How much accretion expense will the company record in its income statement for the 2018 fiscal year?
4. Are depletion of the mine and depreciation of the mining facilities and equipment reported as separate expenses in the income statement?
5. During 2019, Hecala changed its estimate of the total amount of ore originally in the mine from 830,000 to 1,030,000 tons. Calculate the depletion of the mine and depreciation of the mining facilities and equipment for 2019 assuming Hecala extracted 153,000 tons of ore in 2019.

Answer 1

Step 1

Cost of mine to be recorded as under

Development Cost    $ 3,500,000

Mining Equipment (After adjusting residual value) $    157,000

Construction cost    $    83,000

Total    $ 3,740,000

Step 2

Calculation of depletion of mine

Cost per unit worked out to be 3,700,000/830,00 = $ 4.46 per ton

Thus cost of depletion during 2018 will be 123,000 X 4.46 = $ 548,580

Step 3

Calculation of Depreciation of mining equipment will be

   157,700/830,000 = $ 0.19 per ton

Total cost of depreciation will be 123000X 0.19 = $ 23,370

Step 4

answered by: anonymous