Question

Extractive Industries During the year ending 31 December 2019, the Utopia Mining Company is undertaking search and production of ore in three areas. Exploration and evaluation activity is being undertaken in Area A and Area B. Exploration and evaluation expenditure incurred is $875 000 for Area A and $900 000 for Area B in 2019. Another site, Area C, is currently producing ore. Each area is treated as an area of interest. The Utopia Mining Company acquired the right to explore the mining site at Area C for $12 million in 2017 and the company began exploring for ore and incurred $500 000 in 2017. Economically recoverable reserves of 25 million tonnes of ore were confirmed by geologists on 31 December 2017. Geologists estimate that once ore extraction commences the Area C will be operational for approximately 15 years, after which the ore deposit will be exhausted. The land of the mining site has an estimated residual value of $200 000. It is company policy and a community expectation that all mining equipment will be removed when the ore deposit is exhausted and the mine site restored to its original condition. For Area C, during 2018 the company spent $650 000 developing the property and $1 020 000 on purchasing and installing the following assets: Costs Estimated life Mine building $900 000 30 years Other mine equipment $120 000 10 years The building cannot be economically removed from the mine location, but the other mine equipment can be removed and has alternative use. On 31 December 2018 it is estimated that development and construction activities have resulted in $ 1 000 000 of future restoration costs. A discount rate of 5% is identified by the company as best reflecting the risk and commercial conditions associated with Area C. Production in Area C commenced on 1 January 2019. The details of operations during the period 1 January 2018 to 31 December 2019 are summarised below. Tonnes of ore mined 1 500 000 Tonnes of ore sold (at $10 per tonne) 1 000 000 Production costs (excluding depreciation and amortization) $2 000 000 Administration expense $250 000 Selling expense $120 000 Income tax expense $2 100 000 Restoration costs $560 000 REQUIRED: (1) Assume all costs incurred during the exploration and evaluation phases were capitalised. Calculate the depreciation expense and the amortisation expense for the year ended 31 Dec 2019. No journal entry is required. (2)Calculate the cost of goods sold (COGS) for the year ended 31 Dec 2019. (3)Calculate the net profit of the company for the year ended 31 Dec 2019. Show the steps in your calculations. Round to the nearest $ amount. No narration is required.

Answer 1