Question

On May 1, 2021, 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 $9.2 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 Mining equipment Construction of various structures on site $2,400,000 146,800 32,400 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 720,000 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 $520,000 620,000 720,000 Probability 308 30% 40% Hecala's credit-adjusted risk-free interest rate is 8%. During 2021, Hecala extracted 112,000 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. 2. 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. 3. How much accretion expense will the company record in its income statement for the 2021 fiscal year? 4. Are depletion of the mine and depreciation of the mining facilities and equipment reported as separate expenses in the income statement? 5. During 2022, Hecala changed its estimate of the total amount of ore originally in the mine from 720,000 to 920,000 tons. Calculate the depletion of the mine and depreciation of the mining facilities and equipment for 2022 assuming Hecala extracted 142,000 tons of ore in 2022

Answer 1

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Requirement 1
Mining site		$     9,200,000
Development costs		$     2,400,000
Restoration costs	Working-1	$         463,069
		$   12,063,069
Working-1
$520,000*30%		$         156,000
$620,000*30%		$         186,000
$720,000*40%		$         288,000
		$         630,000
$630,000 x .73503		$         463,069
*Present value of $1, n = 4, i = 8%
Requirement 2
Depletion per ton	$12,063,069/720,000	$         16.7543	per ton
Depletion Total	112,000*$16.7543	$     1,876,477
Depreciation of machinery:	($146,800-$10,000)/720,000	$           0.1900	per ton
	112,000*$0.1900	$           21,280
Depreciation of structures:	$32,400/720,000	$           0.0450	per ton
	112,000*$0.0450	$              5,040
Requirement 3
2021 accretion expense	$463,069*8%*8/12	$           24,697
Requirement 4
Depletion of natural resources and depreciation of assets used in the extraction of natural resources are part of product cost
therefore are included in the cost of the inventory of the mineral, just as the depreciation on manufacturing equipment is included in inventory cost.
The depletion and depreciation are then included in cost of goods sold in the income statement when the mineral is sold.