Question

THESE FACTS PERTAIN TO THIS QUESTION AND THE FOUR QUESTIONS THAT FOLLOW

On March 31, 2008, Kellwood acquired a gold mine for $16,000,000. At the time of acquisition, the Proven and Probable gold reserves of the mine were estimated to be 1,640,000 ounces. During the period April 1, 2008 through December 31, 2008, Kellwood incurred intangible development costs of $8,395,000; tangible equipment costs of $54,200; and exploration costs of $565,000. Kellwood has taken the position that the exploration costs are to be expensed, rather than capitalized. Kellwood estimates that future restoration costs will amount to $1,720,000 to be paid on the last day of the mine's estimated life, and that the salvage value of the mine will be $125,000. In accordance with GAAP, Kellwood's management determines the value of its asset retirement obligations using the Credit-Adjusted Risk-free Rate of 3 percent.

Following development, the mine was placed in service on January 1, 2009. Since that time, no additional development or exploration costs have been incurred. For all periods of operation through December 31, 2011, Kellwood extracted 656,000 ounces of the total estimated reserves. As of December 31, 2011, 32,800 of these ounces remained in inventory.

During December 2011, the price of gold dropped and is not expected to recover in the foreseeable future. Accordingly, on January 1, 2012, Kellwood tested whether or not the mine was impaired. After implementing every possible cost cutting measure, Kellwood was able to establish the following projected future cashflows for the remaining life of the mine. The company used these cashflows for calclulating the fair value of the mine:

Year 2012 net cash INFLOW of $4,573,000
Year 2013 net cash INFLOW of $3,102,000
Year 2014 net cash OUTFLOW of $(4,265,000)
Year 2015 net cash INFLOW of $2,951,000
Year 2016 net cash INFLOW of $3,393,000
Year 2017 net cash INFLOW of $5,312,000
Year 2018 net cash OUTFLOW of $(2,279,000)
Year 2019 net cash INFLOW of $7,376,000

All cashflows are deemed to occur at the end of each respective year. The restoration costs of $1,720,000 are included in the final net cashflow shown above. However, GAAP REQUIRES such costs to be EXCLUDED from future cash flows for purposes of determining the impairment of a long-lived asset. Thus, the final cash flow should be adjusted for this amount when determining the Net Present Value of the mine's future cash flows. The company uses a discount rate of 3 percent to determine the net present value of the mine's future cashflows.

If impaired, what is the amount of the impairment loss that Kellwood should record on its investment in the mine on its 2012 income statement?

What is the total cost of the mine placed in service on January 1, 2009?

Rounded to the nearest penny, what is the mine's depletion rate per ounce of gold extracted?

What is the total depletion expense that should have been recorded in Cost of Goods Sold for all periods through December 31, 2011?

According to the standards governing the impairment of long-lived assets, the mine is impaired. True, False

Please be detailed; Thank you!!

Answer 1

The amount of imairment loss it should reecord is the decrease in an asset's net carrying value that exceeds the future undisclosed cash flow it should generate.

present value of cashflows at a discounting rate of 3 for 8 years = 7.020

Total cash flows = 18623000

present value of cashflows =18623000*7.02
                                                = 130733460

Total value of the asset

ACQ COST=16000000

DEVEL COST=8395000

TANG EQIP COST =54200

TOTAL COAST OF THE ASSET = 24449200

impairment loss = 130733460-24449200

                              = 106284260

2) total cost of the mine placed in service on January 1,2009 =24449200
3)Depletion rate per ounes=total cost / estimated gold reserves

                                               =24449200/1640000

=15

4)Total depletion expense that should have been recorded in Cost of Goods Sold for all periods through December 31, 2011 = (total gold reserve extracted – closing inventory )* rate per ounes
5)TRUE, THE MINE IS IMPAIRED