Zhang Zinc Mines Ltd. decided on 1 April 20X8 to dispose of one of its mining properties in northern Ontario. The property consists of mineral rights (an intangible asset) and the on- site mining equipment. The mineral rights have a carrying value of $ 1,000,000 while the mining equipment has a net book value (after depreciation) of $ 400,000. Due to the currently depressed value of zinc on the world market, the value of the mineral rights is estimated to be $ 800,000. The recoverable amount of the mining equipment is very low, no more than $ 100,000 because most of the equipment is fixed to the property and cannot be moved at any reasonable cost. Zhang’s Board of Directors has launched an active search for a resource company ( or a speculator) to buy the mine; the board is confident of finding a buyer in no more than one year. As a public company traded on the TSX, Zhang must provide quarterly statements to the shareholders.
1. Prepare journal entries to recognize the mineral rights and equipment as a disposal group, including any reclassification entries, if necessary.
2. Assume that at 30 June (the end of the second quarter), the value of zinc has increased and the mineral rights are worth $ 1,150,000. Prepare any necessary journal entries to reflect the increase in value.
3. On 21 August ( in the third quarter), Zhang signs a contract to convey all rights to the mine and the equipment to Rio Tonto Inc., an Australian- based mining company. The contract price is $ 1,350,000. Prepare the journal entry (or entries) to record the sale.