Khamsah Mining Ltd. is a small private company that purchased a tract of land for $720,000. After incurring exploration costs of $83,000, the company estimated that the tract will yield 120,000 tonnes of ore having enough mineral content to make mining and processing profitable. It is further estimated that 6,000 tonnes of ore will be mined in the first and last years and 12,000 tonnes every year in between. The Land is expected to have a residual value of $30,000.
The company built necessary bunkhouses and sheds on the site at a cost of $36,000. It estimated that these structures would have a physical life of 15 years but, because they must be dismantled if they are to be moved, they have no residual value. The company does not intend to use the buildings elsewhere. Mining machinery installed at the mine was purchased second-hand at a cost of $60,000. This machinery cost the former owner $ 150,000 and was 50% depreciated when it was purchased. Kharnsah Mining estimated that about half of this machinery will still be useful when the present mineral resources are exhausted but that dismantling and removing it would cost about as much as it is worth at that time. The company does not intend to use the machinery elsewhere. The remaining machinery is expected to last until about one half the present estimated mineral ore has been removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery.
Kharnsah also spent another $126,400 in opening up the mine so that the ore could be extracted and removed for shipping. The company estimates that the site reclamation and restoration costs that it is responsible for by contract when the mine is depleted have a present value of S53 ,600. Kharnsah follows a policy of expensing exploration costs and capitalizing development costs.
(a) As chief accountant for the company, you are to prepare a schedule that shows the estimated depletion and depreciation costs for each year of the mine’s expected life.
(b) Prepare the journal entry(ies) to record the transactions for the acquisition of the mining property and related assets during the first year. Also prepare entries to record depreciation and depletion for the first year. Assume that actual production was 5,000 tonnes. Nothing occurred during the year to cause the company engineers to change their estimates of either the mineral resources or the life of the structures and equipment.
(c) Assume that 4,500 tonnes of product were processed and sold during the first year of the mine’s expected life. Identify all costs mentioned above that will be included in the first-year income statement of Khamsah .Mining Ltd.