On May 1, 2016, Hecala Mining entered into an agreement with the state of New Me
ID: 2490677 • Letter: O
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 $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.):
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:
Hecala’s credit-adjusted risk-free interest rate is 8%. During 2016, Hecala extracted 123,000 tons of ore from the mine. The company’s fiscal year ends on December 31.
Determine the amount at which Hecala will record the mine. (Round "Depreciation" and "Depletion" rates to 4 decimal places.)
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.)
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.)
Are depletion of the mine and depreciation of the mining facilities and equipment reported as separate expenses in the income statement?
During 2017, 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 2017 assuming Hecala extracted 153,000 tons of ore in 2017. (Round "Depreciation" and "Depletion" rates to 4 decimal places.)
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 $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.):
Explanation / Answer
Solution:
1) Calculation of the amount at which Hecala will record the mine:
Restoration costs = [(630,000 * 30%) + (730,000 * 30%) + (830,000 * 40%)] * 0.73503
= 543,922
Working Note:
= 1/ (1 + 8%)4
= 0.73503
2) Calculation of Depletion of the mine, Depreciation of machinery and Depreciation of structures:
Depletion of the mine:
= (14,343,922/ 830,000 tons) * 123,000 tons
= 2,125,666
Depreciation of machinery:
= [(167,700 - 10,000)/ 830,000 tons] * 123,000 tons
= 23,370
Depreciation of structures:
= (83,000/ 830,000 tons) * 123,000 tons
= 12,300
3) Calculation of accretion expense will the company record in its income statement for the 2016:
Accretion expense will the company record in its income = 543,922 * 8% * 8/12
= 29,009
4) Depletion of the mine and depreciation of the mining facilities and equipment reported as separate expenses in the income statement:
No.
When the mineral is sold the depreciation and depletion are then included in cost of goods sold in the income statement.
5) Calculation of the mine and depreciation of the mining facilities and equipment for 2017:
Depletion:
Depreciation of machinery:
Depreciation of structures:
Mining site 10,300,000 Development costs 3,500,000 Restoration costs 543,922 Cost of the mine 14,343,922Related Questions
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