Question

On May 1, 2018, Hecala Mining entered into an agreement with the state of New Mexico to obtain the rights to operate a mineral mine in New Mexico for $9.2 million. Additional costs and purchases included the following (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):

Development costs in preparing the mine	$	2,400,000
Mining equipment		146,800
Construction of various structures on site		32,400

After the minerals are removed from the mine, the equipment will be sold for an estimated residual value of $10,000. The structures will be torn down.

Geologists estimate that 720,000 tons of ore can be extracted from the mine. After the ore is removed the land will revert back to the state of New Mexico.

The contract with the state requires Hecala to restore the land to its original condition after mining operations are completed in approximately four years. Management has provided the following possible outflows for the restoration costs:

Cash Outflow				Probability
$	520,000			30%
	620,000			30%
	720,000			40%

Hecala’s credit-adjusted risk-free interest rate is 8%. During 2018, Hecala extracted 112,000 tons of ore from the mine. The company’s fiscal year ends on December 31.

Required:

1. Determine the amount at which Hecala will record the mine.
2. Calculate the depletion of the mine and the depreciation of the mining facilities and equipment for 2018, assuming that Hecala uses the units-of-production method for both depreciation and depletion.
3. How much accretion expense will the company record in its income statement for the 2018 fiscal year?
4. Are depletion of the mine and depreciation of the mining facilities and equipment reported as separate expenses in the income statement?
5. During 2019, Hecala changed its estimate of the total amount of ore originally in the mine from 720,000 to 920,000 tons. Calculate the depletion of the mine and depreciation of the mining facilities and equipment for 2019 assuming Hecala extracted 142,000 tons of ore in 2019.

Answer 1

Part 1

Mining site	9200000
Development costs	2400000
Restoration costs ((520000*30%)+(620000*30%)+(720000*40%))*0.73503	463069
Cost of the mine	$12063069

Present value of $1 for 8%, 4 periods = 0.73503

Part 2

Depletion = 12063069/720000*112000 = $1876477

Depreciation of machinery = (146800-10000)/720000*112000 = $21280

Depreciation of structures = 32400/720000*112000 = $5040

Part 3

accretion expense = 463069*8%*8/12 = $24697

Part 4

No

They are included in the cost of goods sold during the times the mineral is sold.

Part 5

Depletion:
Original cost	12063069
Less: 2018 depletion	1876477
Remaining depletable cost	10186592
Revised estimate of tons remaining (920000-112000)	808000
Depletion rate	12.6072
Tons Extracted	142000
2019 depletion	$1790222

Depreciation of machinery:
Original cost	146800
Less: 2018 depreciation	21280
Less: residual value	10000
Remaining depreciable cost	115520
Revised estimate of tons remaining (920000-112000)	808000
Depreciation rate	0.1430
Tons Extracted	142000
2019 depreciation	$20306

Depreciation of machinery:
Original cost	32400
Less: 2018 depreciation	5040
Remaining depreciable cost	27360
Revised estimate of tons remaining (920000-112000)	808000
Depreciation rate	0.0339
Tons Extracted	142000
2019 depreciation	$4814