Question

Buffalo Mining Ltd. is a small private company that purchased a tract of land for $910,400. After incurring exploration costs of $89,000, the company estimated that the tract would yield 140,000 tonnes of ore with enough mineral content to make mining and processing profitable. It is further estimated that 7,000 tonnes of ore will be mined in the first and last years and 14,000 tonnes every year in between. The land is expected to have a residual value of $35,000.

The company built necessary bunkhouses and sheds on the site at a cost of $41,000. It estimated that these structures would have a physical life of 15 years but, because they must be dismantled if they are to be moved, they have no residual value. The company does not intend to use the buildings elsewhere. Mining machinery installed at the mine was purchased second-hand at a cost of $70,000. This machinery cost the former owner $130,000 and was 50% depreciated when it was purchased. Buffalo Mining estimated that about half of this machinery would still be useful when the present mineral resources are exhausted, but that dismantling and removing it would cost about as much as it is worth at that time. The company does not intend to use the machinery elsewhere. The remaining machinery is expected to last until about half of the estimated mineral ore has been removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery.

Buffalo also spent another $121,000 in opening up the mine so that the ore could be extracted and removed for shipping. The company estimates that the site reclamation and restoration costs that it is responsible for by contract when the mine is depleted have a present value of $53,600. Buffalo follows a policy of expensing exploration costs and capitalizing development costs.