South Pacific Energy Company’s balance sheet includes the asset Iron Ore. South Pacific Energy paid $2.2 million cash for a lease giving the firm the right to work a mine that contained an estimated 190,000 tons of ore. The company paid $61,000 to remove unwanted buildings from the land and $71,000 to prepare the surface for mining. South Pacific Energy also signed a $24,000 note payable to a landscaping company to return the land surface to its original condition after the lease ends. During the first year, South Pacific Energy removed 31,500 tons of ore, which it sold on account for $31 per ton. Operating expenses for the first year totaled $242,000 all paid in cash. In addition, the company accrued income tax at the tax rate of 25%.

Requirements

1. Record all of South Pacific Energy’s transactions for the year.

2. Prepare the company’s income statement for its iron ore operations for the first year.

Evaluate the profitability of the company’s operations.