On May 1, 2013, Hecala Mining entered into an agreement with the state of New Me
ID: 2649275 • Letter: O
Question
On May 1, 2013, 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 $9.7 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 machinery will be sold for an estimated residual value of $11,000. The structures will be torn down.
Geologists estimate that 770,000 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
On May 1, 2013, 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 $9.7 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
1. Determine the amount at which Hecala will record the mine.
Working
Present Value of Restoration Cost = 670000*PV(9%,4)
Present Value of Restoration Cost = 670000 * 0.70843
Present Value of Restoration Cost = $ 474,648
Estimated Restoration cost in 4 year = 30%*570000 + 40%*670000 + 30%*770000
Estimated Restoration cost in 4 year = $ 670000
2.Calculate the depletion of the mine and the depreciation of the mining facilities and equipment for 2013, assuming that Hecala uses the units-of-production method for both depreciation and depletion.
Depletion of the mine = 13074648*117000/770000
Depletion of the mine = $ 1,986,667
Depreciation of the Mining machinery = (157300-11000) * 117000/770000
Depreciation of the Mining machinery = $ 22,230
Depreciation of the Structure = 53900 * 117000/770000
Depreciation of the Structure = $ 8190
Depreciation of the mining facilities and equipment = Depreciation of the Mining machinery + Depreciation of the Structure
Depreciation of the mining facilities and equipment = 22230 + 8190
Depreciation of the mining facilities and equipment = $ 30420
3.How much accretion expense will the company record in its income statement for the 2013 fiscal year?
Accretion expense will the company record in its income statement for the 2013 fiscal year = Present Value of Restoration Cost* 9%*8/12
Accretion expense will the company record in its income statement for the 2013 fiscal year = 474648*0.09*8/12
Accretion expense will the company record in its income statement for the 2013 fiscal year = $ 28,479
4.Are depletion of the mine and depreciation of the mining facilities and equipment reported as separate expenses in the income statement?
Yes
5.During 2014, Hecala changed its estimate of the total amount of ore originally in the mine from 770,000 to 970,000 tons. Calculate the depletion of the mine and depreciation of the mining facilities and equipment for 2014 assuming Hecala extracted 147,000 tons of ore in 2014.
Mine Outstanding Value at beginning = 13074648 - 1986667 + 28479
Mine Outstanding Value at beginning = 11116460
mining facilities and equipment = 157300 + 53900 - 30420
mining facilities and equipment = 180780
Depletion of the mine = 11116460*147000/(970000-117000)
Depletion of the mine = $ 1,915,732
Depreciation of the mining facilities and equipment = (180780-11000)*147000/(970000-117000)
Depreciation of the mining facilities and equipment = $ 29259
Mining Site 9700000 Development Cost 2900000 Present Value of Restoration Cost 474648 Total Cost of Mine to be recorded 13074648Related Questions
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