Question

On May 1, 2025, 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 $10.1 million. Additional costs and purchases included the following: Development costs in preparing the mine $2,500,000Mining equipment 143,400Construction 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%Hecalaâs credit-adjusted risk-free interest rate is 7%. During 2021, Hecala extracted 113,000 tons of ore from the mine. The companyâs fiscal year ends on December 31.Required:a. Determine the amount at which Hecala will record the mine.b. Calculate the depletion of the mine and the depreciation of the mining facilities and equipment for 2021, assuming that Hecala uses the units-of-production method for both depreciation and depletion.c. How much accretion expense will the company record in its income statement for the 2021 fiscal year?d. Are depletion of the mine and depreciation of the mining facilities and equipment reported as separate expenses in the income statement?e. During 2022, 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 2022 assuming Hecala extracted 143,000 tons of ore in 2022.

Answer 1

Answer:

Hecala Mining

a) Hecala will record the mine at a cost of $12600,000

b1) Depletion of Mine for 2021:

= 113,000 * $17.26

= $1,950,380

b2) Depreciation of mining facilities and equipment for 2021:

= 113,000 * $0.23

= $25,990

c) Accretion expense:

= $155,000 * 0.763

= $118,265

d) Yes.  The depletion of the mine and the depreciation of the mining facilities and equipment are reported as separate expenses in the income statement.

e1) Depletion of mine in 2022:

= $13.04 * 143,000

= $1,864,720

e2) Depreciation of facilities and equipment:

= $0.17 * 143,000

= $24,310

Explanation:

a) Data and Calculations:

Cost of Mining rights =     $10,100,000

Development costs =          2,500,000

Cost of mines =                $12,600,000

Construction of facilities =          $36,500

Mining equipment = $143,500

Salvage value               12,000

Depreciable value of equipment 131,500

Cost of facilities & equipment  $168,000

Geologists production estimate = 730,000 tons

Period of mining = 4 years

b) Cost of Mine Restoration:

Cash Outflow     Probability       Expected cost

$530,000                40%                $212,000

 630,000                30%                   189,000

 730,000                30%                   219,000

Costs of Mine Restoration           $620,000

Interest rate = 7%

Annual cost of mine restoration = $155,000 ($620,000/4)

c) Depletion of mine based on original output estimate:

= $12,600,000/730,000

= $17.26 per ton

Revised Depletion of mine:

Depleted cost of mine = $12,600,000 - $1,950,380 = $10,649,620

Depleted tons balance = 930,000 - 113,000 = 817,000 tons

Depletion per ton = $10,649,620/817,000 = $13.04 per ton

d) Depreciation rate of facilities and equipment:

= $168,000/730,000

= $0.23 per ton

Revised Depreciation rate:

Cost of facilities and equipment = $142,010 ($168,000 - $25,990)

Rate = $142,010/817,000

= $0.17 per ton