Copper Products Limited leases property on which copper has been discovered. The lease provides for an immediate payment of $472,000 to the lessor before drilling has begun and an annual rental of $55,000. In addition, the Jessee is responsible for cleaning up the waste and debris from drilling and for the costs associated with reconditioning the land for farming when the mine is abandoned. It is estimated that the legal obligation related to cleanup and reconditioning has a present value of $46,000. Copper Products has publicly pledged an additional $30,000 (present value) to reclaim the area surrounding the mine. Copper Products prepares financial statements in accordance with IFRS.
Instructions
(a) Determine the amount that should be capitalized in the Mineral Resources asset account as a result of the lease agreement.
(b) Would the amount provided in part (a) differ if Copper Products prepares financial statements in accordance with ASPE?
(c) Prior to entering into the lease agreement, assume that Copper Products had total debt of $580,000 and total assets of $1,000,000. Also assume that the immediate payment of$472,000 was paid upfront in cash. From the perspective of a creditor, discuss the effect of the lease agreement on Copper Products' debt to total assets ratio. Assume that Copper Products follows IFRS.