Yount Mining Company has a December 31 fiscal year end. The following information relates to its Gough Alexander mine:
1. Yount purchased the Gough Alexander mine on March 31, 2013, for $2.6 million cash. On the same day, modernization of the mine was completed at a cash cost of $260,000. It is estimated that this mine will yield 560,000 tonnes of ore. The mine's estimated residual value is $200,000. Yount expects it will extract all the ore, and then close and sell the mine site in four years.
2. During 2013, Yount extracted and sold 120,000 tonnes of ore from the mine.
3. At the beginning of 2014, Yount reassessed its estimate of the remaining ore in the mine. Yount estimates that there is still 550,000 tonnes of ore in the mine at January 1, 2014. The estimated residual value remains at $200,000.
4. During 2014, Yount extracted and sold 100,000 tonnes of ore from the mine.
Instructions
(a) Prepare the 2013 and 2014 journal entries for the above, including any year-end adjustments.
(b) Show how the Gough Alexander mine will be reported on Yount's December 31, 2014, income statement and balance sheet.
TAKING IT FURTHER
If the total estimated amount of units that will be produced (extracted) changes during the life of the natural resource, is it still appropriate to use the units-of-production method? Explain.