Question

In 20x0, the Tyra Corporation obtained the mining rights for a property in Northern Ontario for

$10,000,000. During the year 20x0, Tyra invested another $5,000,000 to build the infrastructure

of the mine. The mine became operational on December 31, 20x0. Tyra expects that the mine

will be operational for 15 years after which the site will have to be restored at a cost of

$8,000,000. The total output of the mine is expected to be 500,000 tonnes of ore. Tyra will be

using the units of production method of depreciation for both the mining rights and the

infrastructure.

Required –

a) During 20x1 and 20x2, the total tonnes of ore mined was 27,300 and 36,000 respectively.

Assuming a discount rate of 5%, prepare all journal entries for the years ended December

31, 20x0, 20x1 and 20x2.

b) In 20x8, Tyra estimates that the total output of the mine will be 450,000 tonnes and that

the mine will be closing on December 31, 20x12. The cost to restore the site is now

estimated to be $8,500,000. Total tonnes mined to December 31, 20x7 was 210,000

tonnes. A total of 31,000 tonnes were extracted in 20x8. Assuming a discount rate of 4%,

prepare all journal entries for the year ended December 31, 20x8.

Answer 1

a)

PV of the restoration cost = $8,000,000 * PV at the rate 5% for 15 years

= $8,000,000 * 0.481017

= $3,848,137

Therefore total value of the asset to be depleted = $10.000,000 + 5,000,000 + 3,848,137

= $18,848,137

Expected total output of the mine = 500,000 tonnes

Rate of Depletion = $18,848,137 / 500,000 = $37.70 per tonne

The Journal entries would be:

Required b

In the year 20x8, certain estimates were revised:

Revised restoration cost = $8,500,000

PV of the revised restoration cost = $8,500,000 * PV at the rate 4% for 5 years

= $8,500,000 * 0.821927

= $6,986,380

Total balance in ARO account as at 1st Jan 20x8 = $3,848,137 * 1.057

= $5,414,715

Total Accretion expense to be recorded for 20x8 = ($6,986,380 - $5,414,715) + $6,986,380 * 4%

= $1,851,120

Total tonnes of mine used till 31st Dec 20x7 = 210,000

Carrying value of Ore Deposit as on 1st Jan 20x8 = $18,848,137 - ($18,848,137 / 500,000 * 210,000)

= $10, 931,920

Remaining tonnes of ore in mine as per revised estimation = 450,000 -210,000 = 240,000 tonnes

Revised depletion rate = $10,931,920 / 240,000 tonnes = $45.55 per tonne

Depletion for 20x8 would be = $45.55 *31,000 = $1,412,050

The Journal entries would be:

For any clarification, please comment. Kindly Up Vote