The accounting staff at Golden Mining Company will soon prepareyear-end entries

Question

The accounting staff at Golden Mining Company will soon prepareyear-end entries to the

accounting system to record the partial consumption of certainlong-term assets. Your advice

is sought regarding each of the following situations.

1. A mining site was acquired 10 years ago at a cost of$4,900,000. This included $700,000

to prepare an environmental impact statement, conduct a requiredsurvey, and build

road access. The mine was expected to produce approximately 20million tons of highgrade

ore, after which the site could be sold for $500,000. This pastyear, 3.0 million tons

were produced, processed, and sold.

2. Trucks and machinery having an estimated useful life of fiveyears are being depreciated

by the double-declining-balance method. These assets werepurchased for $152,000 and

have an estimated residual value of $22,000. This is the end oftheir third year in use.

3. A patent relating to the ore-refining process was purchasedthree years ago at a cost of

$57,000. At the time of purchase, the patent had a remaininglegal life of eight years.

Management wants the required write-off of the patent’scost to have the minimum

effect on net income that is allowed under thecircumstances.

Required

A. Assist the accounting staff by suggesting the year-endentries that should be made to the

accounting system for each of the situations above.

B. Assume the trucks and machinery have always been depreciatedusing the straight-line

method. Assume further that it was determined during the currentyear that the estimated

useful life would actually be a total of 10 years with aresidual value of $2,000.

What amount of depreciation expense would have been reportedduring each of the first

two years under the straight-line method? What amount ofdepreciation expense will be

reported for the current year and the years that follow underthe straight-line method?

Explanation / Answer

Year

Opening Balance

Depreciation

Closing Balance

$152,000

$91,200

$54,720

Cost of Site acquisition $4,900,000 Add : Development Cost viz. preparationof environmental          impact,survey, road access $700,000 Total cost $5,600,000 Less : Estimated residual value $500,000 Depletable base $5,100,000 Estimated Production ( in tons) 20,000,000 Depletion per ton $5,100,000 / 20,000,000 $0.255 per ton Depletion for the pastyear       3,000,000 x .255 $765,000 Cost of GoodsSold 3,000,000 x.255 765,000     NaturalHighgrade Ore 765,000 To record annual depletion charge for 3million tons produced and sold

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