Reference no: EM132609263
ABC Mining Ltd. is a small mining company. After purchasing a tract of land for $500,000 and incurring exploration costs of $80,000, the company has found mineral deposits (ore) estimated at 100,000 tonnes. It is further estimated that 5,000 tonnes of ore will be mined in the first and last (11th) years and 10,000 tonnes every year in between. The land is expected to have a residual value of $25,000.
Structures and storing facilities have been build on site at a cost of $40,000. These structures are expected to have a useful 18 years with 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 $80,000. Half of this machinery would last 15 years with no residual value. The company does not intend to use the machinery elsewhere. The other half of the machinery has a use life of 4 20 years with no residual value, but can be used at ABC's operations elsewhere. Cost is to be allocated equally between these two groups of machinery.
ABC also spent another $150,000 to build a shaft into the mine so that ore could be extracted. The company estimates that the site reclamation and restoration costs that it is responsible for under the prevailing laws when the mine is depleted have a present value of $50,000. ABC follows the policy of expensing exploration costs and capitalizing development costs.
Required:
Question (1) Calculate the fair value of the mining property, excluding the structures and machinery.
Question (2) Prepare journal entries to record the fair values of the mining property, and the related expenses and assets.
Question (3) ABC extracts and removes 6,000 tonnes of ore in the first year of operations. Prepare journal entries for depreciation and depletion for that year.
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