Question

Saltworks Inc.

Saltworks Inc. (SI) produces salt. Its main assets are two properties that have salt mines in them (mine 1 and mine 2). The salt exists in a crystalline layer of rock that rests about 50 metres below ground. To mine the salt, tunnels are created by drilling through the rock. When the salt layer is reached, holes are drilled and spring water is then fed through the holes. The water dissolves the salt and a cave develops over time filled with salty water. The salt water is removed from the hole, concentrated, and dried. It is then ground up and packaged. The life of a salt mine is about 30 years. Mine 1 is almost fully mined, so there is very little salt left. Mine 2 is a new mine and the tunnels are currently being dug. So far, $500,000 of costs have been incurred this year to drill and build tunnels for mine 2.

Mine 1 is completely depreciated. Recently, SI discovered a new vein of salt in the mountain where mine 1 previously existed. The company's engineers feel that this new mine (mine 3) will produce at least as much salt as mine 1. Costs of $300,000 have been incurred to date to locate and test the salt. The salt from mine 3 is of a different quality and SI is not sure that a market currently exists for this salt or that the costs of mining will be recoverable from future revenues. The company plans to continue developing the mine to confirm this.

The mountain that houses mine 2 is covered with pine trees. An unrelated company (Logging Co. or LC) has approached SI for the rights to cut the trees down. SI has agreed to sell these rights for $400,000, which has been paid up front. The contract gives LC the right to cut down a certain number of trees over the next three years. In order to gain access to the trees, logging roads must be built. LC has approached SI about sharing the costs (equally) of building the roads. SI has agreed as it feels it can use the roads later to transport salt. Already, costs of $1 million have been incurred to build the roads. Unfortunately, the work done to date on the roads has to be redone due to excessive rainfall, which led to a huge flood. The flood washed out parts of the new road.

A local environmental group has discovered that LC will be cutting down trees and is currently in discussions with SI demanding that SI replant the mountain with small seedlings that will grow into trees to replace the trees that will be cut down. Although no contracts have been signed and SI has not specifically agreed to any course of action, SI has assured the group that it is company policy to be environmentally conscientious.

SI's president recently had a meeting with the CEO of a public company that is looking to purchase SI in the next year. The CEO is anxious to have a look at SI's financial statements and has asked that they be prepared in accordance with IFRS.

Instructions

Assume the role of the accountant for SI and discuss the financial reporting issues relating to the above. SI is a private company.

Answer 1

Introduction :

Saltworks Inc (SI) is produces salt. It has two mines at present to dig the salt from mines called mine1 and mine 2. Mine 1 now completed depreciated and it fully dug. And new mine is Mine 2, incurred $500,000 to drill and tunnels. And new mine 3 was discovered is same as mine1 and cost $ 300,000 was incurred to the date and locate the salt. The mine 3 salt is different quality, so not sure to its have pleasant sales in market. And Logging Co. (LC) has approached SI for buying right of cutting trees for $ 400,000 covered at mine2, but later agreeing the contract, LC again approached the SI for building the road to transport the cutted trees. And LC asked the SI to share the cost of build roads and SI agreed. But later some parts of  roads were washed out because of heavy floods. Because of environment safe the local environment group ask SI to plant the trees on the place of trees cut.

Role of Accountant :

The accountant of Saltworks Inc (SI) should look and account following things,

For Mine 1:

1. Amount incurred on Mine 1 should be properly and accurately accounted and valued. The remaining life of it should be properly estimated based on past experience and reports. On that base revenue and expenses should be allocated.

2. Estimate the little salt left in the mine value and cost to be incurred.

For Mine 2:

1. Till now cost incurred $500,000 for drill and tunnel should be accounted in books of SI. and also see whether the licence cost for mine 2 was accounted properly.

For Mine 3:

1. SI newly discovered this on mountain by incurring the cost of $300,000, if these cost is useless then this should be recover from future revenue from the group, otherwise from the mine 3 if it well settled in market.

2. About the mine 3 all the documents and reports should be documented for future reference.

Right to Logging Co.:

1. Accountant should record the sale of right to cut the pine trees covered at mine 2. and should also study the contract terms between the LC and SI about number of trees to cut and length to cut, and cut all types of trees or particular trees and so on.

2. Amount of build roads should properly allocated between LC and SI. And already incurred cost of build road of $1 million should be share to LC and before this inform to LC.

3. The cost of washed out parts of roads whether is burn by both the companies or LC should be decided based on the contract.

4. The cost of planting new plants on the cut trees should be analysed about how many plants need to plant and what type of plant was used to plant on the cut trees.

Others:

1. On the base of above the accountant prepare the financial reports and submitted to CEO and CFO for their references.

Financial Report Issues:

1. Mine 1 was fully depreciated whether it should be continued to report in financial statements or to eliminate by disposals.

2. Mine 3 was just started whether make the provision for the incurred cost of $300,000 because is it have pleasant market or not in future the company not sure.

3. Already incurred $1 million for build roads for transport of salt whether it is shared by both LC and SI equally or more part to SI, its not clear.

4. Estimation of rework cost to build the washed out roads is some difficult also to shared between LC and SI in equal proportion.

5. Additional cost of replant the mountain with seedling on the cut trees, whether it is shared by LC and SI equally its not clear.

The above things need to be consider while thinking about to purchase the SI by SI's president.