Question

In July 2017, Hanna Palladium Mines Inc. (Hanna), a public company, began operation of its new palladium mine.
Geologists estimate that the mine contains about 310,000 ounces of palladium. Hanna incurred the following capital costs in starting up the mine:
Exploration and development $25,000,000 Mine extraction equipment 18,000,000 Buildings 5,000,000
The exploration and development costs were incurred to find the mine and prepare it for operations. The mine extraction equipment should be useful for the entire life of the mine and Hanna should be able to sell the equipment for $3,500,000 when the mine is exhausted in ten years. The buildings are expected to last much longer than the ten-year life of the mine, but they won't be useful once the mine is shut down.
The production engineers estimate that all the palladium can be removed from the mine over ten years. They estimate the following year-by-year production for the mine:
2018 5,000 ounces 2019 25,000 ounces 2020-2025 40,000 ounces 2026 30,000 ounces 2027 10,000 ounces
Hanna's year-end is June 30.

Required:
a. Show the journal entries necessary to record the purchase of the extraction equip ment and the construction of the buildings.
b. Prepare depreciation schedules using the straight-line, declining balance (20 percent per year), and units-of-production methods for the three types of capital costs.
c. Which method would you recommend that Hanna use to depreciate its capital assets? Explain. Do you think the same method should be used for each type of
capital asset? Explain.
d. The mine is viable as long as the cash cost of extracting the platinum remains below the price Hanna can obtain for its platinum. If the price falls below the cash cost of extraction, it may be necessary to close the mine temporarily until prices rise. What would be the effect on depreciation if the mine were temporarily shut down?
e. Under some circumstances, it may become necessary to shut the mine permanently.
How would you account for the capital assets if the mine had to be shut down permanently? Show the journal entries you would make in regard to the capital assets in this event. State any assumptions you make.



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  • CreatedFebruary 26, 2015
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