Question

Colorado Mountain Mining paid $ 896,900 for the right to extract mineral assets from a 500,000​-ton deposit. In addition to the purchase​ price, Colorado also paid a $ 1,000 filing​ fee, a $ 2,100 license fee to the state of​ Nevada, and $ 50,000 for a geological survey of the property. Because Colorado purchased the rights to the minerals only and did not purchase the​ land, it expects the asset to have zero residual value. During the first​ year, Colorado removed and sold 60,000 tons of the minerals. Make journal entries to record​ (a) purchase of the minerals​ (debit Minerals),​ (b) payment of fees and other​ costs, and​ (c) depletion for the first year.

Answer 1

Answer:

(a) The asset would be recorded in accordance to IAS 16 Property, plant & equipment.

Dr  Mining Asset   896,900

Cr       Bank                     896,900

(b) IAS 16 says that the costs incurred to make the asset ready for use must be capitalized as part of the asset. This means the license fee $1000 filing fee, License fee $2100 and $50,000 amount paid for geological survey must be capitalized. So the entry is as under:

Dr Mining asset (1k+2.1k+50k) $53,100

Cr                      Bank                       $53,100

(c) This assets must be depreciated on the basis of tons of minerals extracted which is 60 thousands tons in the first year.

Depreciation Expense = (60k tons / 500k tons)   * (Total capitalized cost)

=(60,000/500,000) * (896,900+53,100) = $108,000

The Double entry of Depreciation Expense would be as under:

Dr Depreciation Expense  $108,000

Cr                Accumulating Depreciation  $108,000