Question

Problem 11-13 Depreciation and depletion; change in useful life; asset retirement obligation; Chapters 10 and 11 [LO11-2, 11-3, 11-5]

On May 1, 2018, 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 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 $ 2,200,000

Mining equipment 117,000

Construction of various structures on site 24,500

After the minerals are removed from the mine, the equipment will be sold for an estimated residual value of $12,000. The structures will be torn down.

Geologists estimate that 700,000 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 Probability

$ 500,000 40%

600,000 30%

700,000 30%

Hecala’s credit-adjusted risk-free interest rate is 7%. During 2018, Hecala extracted 110,000 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 2018, 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 2018 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 2019, Hecala changed its estimate of the total amount of ore originally in the mine from 700,000 to 900,000 tons. Calculate the depletion of the mine and depreciation of the mining facilities and equipment for 2019 assuming Hecala extracted 140,000 tons of ore in 2019.

1.

	2019 Depletion Depreciation of machinery Depreciation of structures

2.

	Depletion Depreciation of machinery Depreciation of structures

3.

Accretion Expense

4.

Separate expenses in the income statement

5.

	2019 Depletion Depreciation of machinery Depreciation of structures

Answer 1

Refer below images for the above asked questions, in a detailed way of solution.

solution : Hecalo's cast determined of the mineral mine is $ 11650111 as follows: Partiwlars Mining site Development Restoration Amount $9 000 000 $ 2200000 costs Costs $ 45010 @ $11650lll @ wbrizing & 500000 $40% = $200000 $ 6ooooo * 301 = $ 180000 $ 700 000 * 364. - $ 210000 $ $ 90000 x •7629* - $458111 O present value of $1,0=4, i=74. Depletion: $10650111 700.000 tons = $16.6430 per ton 110000 tons X $ 16.6430 = $1830730 Depreciation of Machinery: cost of equipment - residual value Estimated tons = $ 119000 - $12000 700000 tons 0.15 perton . 110ooo tons x $0.15 perton - & 16500

Depreciation of structures : = $ 0.035 perton = $ 24500 700 000 tons 110000 tons & $ 0.035 perton = $3850 2018 accretion expense: = $21005 $ 4 Solll yooo7 x 8 months 12 months Depletion of natural resources and depreciation of assets used in the extraction of natural resources are part of product cost and therefore are included in the cost of the inventory of the mineral, just as the depreciation on manufacturing eaquipment is included in inventory cost. The depletion and deprecation are then included in cost of goods sold in the income statement when the mineral is sold. 6 A change in the service life of plant y equipment and finite - life intangible assets is accounted for as a change in an estimate. The change is accounted for prospectively by simple depreciating / depleting the remaining depreciable) depletable base of the asset (book value at date of change less estimated residual value) over the revised service life (tons of ore in this case).

* 2019 Depletion : original cost $ 11 65om Less - 2018 depletion & (1830730) Remaining depletable cost $9819381 Revised estimate of tons remaining 790000 tons [ 900000 - 10.oo) Depletion rate & 12-4296 porton x Tons extracted 140000 tons 2019 depletion & $ 17-40144 Less: residual value 2019 Deprecation of equipment: original cost $117000 Less: - 2018 depreciation $ (16500) & 100500 $(12000) Remaining depreciable cost $88500 & Revised estimate of tons remaining (900000 - 110000) 790000 tons Depreciation rate $0.1120 perton * Tons extracted 140000 tons 2019 depreciation > $ 15680

2019 Deprecia hon of structures original cost $24500 Less - 2018 depreciation a (3850) Remaining depreciable $20650 & Revesed estimate of 790000 tons remaining (900000 - 110000) cost tons Depreciation rate x Tons extracted 209 depreciation $0·0261 perton P40000 tons $3654