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Maximus Ltd acquired a mining property in North Queensland, called Clarity for $20.3 million on 1 July 2018 and treated it as an area of
Maximus Ltd acquired a mining property in North Queensland, called Clarity for $20.3 million on 1 July 2018 and treated it as an area of interest. Maximus Ltd incurred the costs as below: Year Details $ Amount August 2018 Right to explore 500.000 2018 - 2019 Exploratory study and drilling 4,500,000 At the beginning of calendar year 2019, the technical feasibility and commercial viability of mining the diamond deposit were confirmed. The company's experts estimated that there were 20 million carats of diamonds could be commercially exploited. From March 2019 to June 2019, the company undertook the following capital investments: Mine buildings Processing plant Other equipment Costs Estimated Life (as at 30 June 2019) $5,600,000 20 years $12,000,000 10 years $3,000,000 5 years Mine buildings cannot be economically removed from the mine location, but the processing plant and other equipment can be economically removed and have alternative uses. On 30 June 2019, Maximus Ltd estimated that the costs of restoration to be incurred at the end of the mine life, as a result of development and construction activities would be $800,000 because the company wished to portray itself as a responsible corporate citizen. A discount rate of 8% was identified as relevant for its diamond operation. Production commenced on 1 July 2019. It will take 9 years to exhaust this economically recoverable reserves, after which time the mining property is expected to have no residual value. Activities for the year ended on 30 June 2020 were as follows: Carats of diamonds mined ..3,500,000 Carats of diamonds sold.. 2,800,000 Selling price of diamond $18 per carat Production costs (excluding depreciation and amortisation). ..$20,000,000 Administration expenses ...$1,800,000 Selling expenses. $800,000 REQUIRED: a) Assume all costs incurred during the exploration and evaluation phases were capitalised, what are the amortisation expense and the total depreciation expense for the year ended 30 June 2020? No journal entry is required. (12 marks) (Question 5 continued over page) b) Some conservative accountants argue that for extractive industries, all pre-production costs should be expensed when incurred, whereas some accountants argue that all pre- production costs should be carried forward, due to the lengthy nature of extractive industry. Discuss these two views in detail and which do you think is better. (8 marks) Insert your answer in the space provided. Show ALL necessary explanations to support your answer. a) Maximus Ltd acquired a mining property in North Queensland, called Clarity for $20.3 million on 1 July 2018 and treated it as an area of interest. Maximus Ltd incurred the costs as below: Year Details $ Amount August 2018 Right to explore 500.000 2018 - 2019 Exploratory study and drilling 4,500,000 At the beginning of calendar year 2019, the technical feasibility and commercial viability of mining the diamond deposit were confirmed. The company's experts estimated that there were 20 million carats of diamonds could be commercially exploited. From March 2019 to June 2019, the company undertook the following capital investments: Mine buildings Processing plant Other equipment Costs Estimated Life (as at 30 June 2019) $5,600,000 20 years $12,000,000 10 years $3,000,000 5 years Mine buildings cannot be economically removed from the mine location, but the processing plant and other equipment can be economically removed and have alternative uses. On 30 June 2019, Maximus Ltd estimated that the costs of restoration to be incurred at the end of the mine life, as a result of development and construction activities would be $800,000 because the company wished to portray itself as a responsible corporate citizen. A discount rate of 8% was identified as relevant for its diamond operation. Production commenced on 1 July 2019. It will take 9 years to exhaust this economically recoverable reserves, after which time the mining property is expected to have no residual value. Activities for the year ended on 30 June 2020 were as follows: Carats of diamonds mined ..3,500,000 Carats of diamonds sold.. 2,800,000 Selling price of diamond $18 per carat Production costs (excluding depreciation and amortisation). ..$20,000,000 Administration expenses ...$1,800,000 Selling expenses. $800,000 REQUIRED: a) Assume all costs incurred during the exploration and evaluation phases were capitalised, what are the amortisation expense and the total depreciation expense for the year ended 30 June 2020? No journal entry is required. (12 marks) (Question 5 continued over page) b) Some conservative accountants argue that for extractive industries, all pre-production costs should be expensed when incurred, whereas some accountants argue that all pre- production costs should be carried forward, due to the lengthy nature of extractive industry. Discuss these two views in detail and which do you think is better. (8 marks) Insert your answer in the space provided. Show ALL necessary explanations to support your answer. a)
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