Question

The Humpty Doo Rare Earths Mining Company started mining operations on 1 July 2019. In the year to the 30^th June 2020 three areas were explored, Europium, Gadolinium, and Terbium. The following costs were incurred:

	Exploration and evaluation costs	Exploration and evaluation costs	Total site                                                    costs
	Property, plant and equipment	Intangibles assets
	$m	$m	$m
Europium	9	18	27
Gadolinium	18	12	30
Terbium	9	21	30
	36	51	87

Rare earths were discovered at Europium on 17^th January 2020. In April 2020 after a review of the prospects for the Gadolinium site it was decided to abandon operations there. Exploration was still a work in progress at the Terbium site, but no decision had been made about the commercial potential of that site. Development of the Europium site had continued during the year and at 30^th June 2020 $36 million had been incurred. These costs are to be written off on a production basis.

This cost relates to the construction of plant and equipment. It is estimated that there are 150,000 tonnes of rare earth which has a current sale price of $3,500 per tonne. By the 30^th June 2020 15,000 tonnes had been extracted at a production cost of $6 million of which 12,000 tonnes were sold.

Required

Record this first year’s transactions by journal entry using the area of interest method.

Answer 1

• Solution -

• first year’s transactions by journal entry using the area of interest method-

Year	Particulars	Debit $m	Credit $m
2019 - 20	Exploration and evaluation assets- Europium A/c	27
	Exploration and evaluation assets- Gadolinium A/c	30
	Exploration and evaluation assets- Terbium A/c	30
	To Cash/ Payable   A/c		87
	Impairment Loss-Exploration and evaluation assets A/c	30
	To Exploration and evaluation assets- Gadolinium A/c		30
	Asset under Construction- Prop. Plant & Equipment A/c	9
	Asset under Construction- Intangible Assets A/c	18
	To Exploration and evaluation assets- Europium A/c		27
	Asset under Construction- Prop. Plant & Equipment A/c	36
	To Cash/ Payable   A/c		36
	Property Plant & Equipment A/c Dr. (36 + 9)	45
	Intangible Assets A/c	18
	To Asset under Construction-Prop. Plant & Equipment A/c		45
	To Asset under Construction- Intangible Assets A/c		18
	Inventory A/c	6.3
	To Acc. Depreciation- PPE (45 / 150000 15000)		4.5
	To Acc. Depreciation- Intangibles (18 / 150000 15000)		1.8
	Inventory A/c	6
	To Cash, Payables , Acc. Depreciation		6
	Cash/Receivables A/c (12000 3500)	42
	To Sales Revenue A/c (12000 3500)		42
	Cost of goods Sold A/c	9.84
	To Inventory A/c (6.3 + 6) / 15000*12000)		9.84

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