Question

EDC Copper Inc. operates a number of copper mines in Peru. On July 1, 2019 the company decided to dispose of one of its mining properties. The property contains mineral rights (an intangible asset) and on-site mining equipment. The mineral rights have a carrying value of $1,200,000 while the mining equipment has a net book value (after depreciation) of $500,000. The value of the mineral rights is estimated to be $850,000, due to the currently depressed value of copper metals on the world market. Since most of the equipment is fixed to the property and cannot be moved at any reasonable cost, the recoverable amount of the mining equipment is very low, no more than $120,000, The board of directors for EDC Copper is already actively searching for a buyer of the mine and they are confident that a buyer will be found within the year. Since the company is publicly traded, they must provide quarterly statements to the shareholders.

Required: 1. Prepare journal entries to recognize the mineral rights and equipment as a disposal group, including any reclassification entries, if necessary.

2. At the end of the third quarter, September 30, assume that the value of copper metals has increased and the mineral rights are worth $1,250,000. Prepare any necessary journal entries to

reflect the increase in value.

3. During the fourth quarter, on November 9, EDC Copper signs a contract which conveys all of the rights to the mine and the equipment to a Chilean-based mining company. The contract price is $1,490,000. Prepare the journal entry (or entries) to record the sale.

Answer 1

1. 1. Journal entry's

(A) Dr. Mining rights $850000

Dr. Mining equipment $120000

Dr. Loss on disposal $730000

Cr. Mining rights $1200000

Cr. Mining equipment $500000

(Once the asset is recognized as disposal group, there after it has to shown at (CARRYING VALUR) OR (FAIR MARKET VALUE minus COST TO SELL) which ever is LOWER.. no depreciation shall be charged there after and loss or gain on disposal shall be transferred to profit and loss account)

(B) Dr. Profit and loss account $730000

Cr. Loss on disposal $730000

(Loss on reclassification has been transferred to profit and loss account)

2. Since the asset is already classified as held for sale, the asset shouldn't be appreciated or depreciated till its sale.. hence no entry required

3. (A) Dr. Chile mining company $1490000

Cr. Mining rights $850000

Cr. Mining equipment $120000

Cr. Profit on sale $520000

(Sale entry)

(B) Dr. Profit on sale $520000

Cr. Profit and loss account $520000

(Profit on disposal transferred to p&l)