On July 1, 2014, Phillips Exploration Inc. invests $1.3 million in a mine that is estimated to have 800,000 tonnes of ore. The company estimates that the property will be sold for $100,000 when production at the mine has ended. During the last six months of 2014, 100,000 tonnes of ore are mined and sold. Phillips has a December 31 fiscal year end.
Instructions
(a) Explain why the units-of-production method is oft en used for depreciating natural resources.
(b) Record the 2014 depreciation.
(c) Show how the mine and any related accounts are reported on the December 31, 2014, income statement and balance sheet.
(d) Assume that the selling price of ore has dropped significantly after December 31, 2014. By June 30, 2015, it is $1.40 per tonne. Does this indicate that the mine may be impaired? Why or why not?