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 30% 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

1. Calculation of the amount of mine to be recorded in the books of Hecala:

Note: 0.735 is a present value factor from the PV table for 4 years at an 8% rate.

Results are as follows:

2. Calculation of depletion of mine, depreciation of mining equipment and facilities:

Results are as follows:

3. Calculation of accretion expense:

Accretion expense = Restoration cost x Interest rate x (number of months remaining / total months)

= $463050 x 8% x (8/12)

= $24,696

4. No, depletion on mine and depreciation of mining facilities and equipment are not reported separately but are included in the cost of goods sold.

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