Question

On May 1, 2016, 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 $9.3 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 $2,500,000 Mining equipment 143,400 Construction of various structures on site 36,500After the minerals are removed from the mine, the equipment will be sold for an estimated residual value of $12,000. The structures will be torn down. Geologists estimate that 730,000 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$530,000 40%630,000 30%730,000 30%Hecala’s credit-adjusted risk-free interest rate is 7%. During 2016, Hecala extracted 113,000 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. (Round "Depreciation" and "Depletion" rates to 4 decimal places.)2. Calculate the depletion of the mine and the depreciation of the mining facilities and equipment for 2016, assuming that Hecala uses the units-of-production method for both depreciation and depletion. (Round "Depreciation" and "Depletion" rates to 4 decimal places.)3. How much accretion expense will the company record in its income statement for the 2016 fiscal year?(Round "Depreciation" and "Depletion" rates to 4 decimal places.)4. Are depletion of the mine and depreciation of the mining facilities and equipment reported as separate expenses in the income statement?5. During 2017, Hecala changed its estimate of the total amount of ore originally in the mine from 730,000 to 930,000 tons. Calculate the depletion of the mine and depreciation of the mining facilities and equipment for 2017 assuming Hecala extracted 143,000 tons of ore in 2017. (Round "Depreciation" and "Depletion" rates to 4 decimal places.)

Answer 1

Answer:

Explanation:

1. Mineral mine - $9.3 million

Development costs - $2500 000

1/[(1+0.07)^4]=0.76290

Restoration costs = $472995 = [(530k * 0.4)+(630k * 0.3)+($730k * 0.3)] *0.76290

Cost of mine= $9.3 million+$2500 000+$472995 = $12272995

2. Depletion:

($12272995/730000tons)*113000tons=$1899792

Depreciation of machinery=($143400-$12000)/730000 * 113000tons = $20340

Depreciation of structures=($36500/730000tons)*113000tons=$5650

3. Accrecion expense recognized:

$472995*0.07*8/12=$22073