Problem 11-13 Depreciation and depletion; change in useful life; asset retirement obligation; Chapters 10 and 11 [LO11-2, 11-3, 11-5]

On May 1, 2018, Hecala Mining entered into an agreement with the state of New Mexico to obtain the rights to operate a mineral mine in New Mexico for $9 million. Additional costs and purchases included the following (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Development costs in preparing the mine $ 2,200,000

Mining equipment 117,000

Construction of various structures on site 24,500

After the minerals are removed from the mine, the equipment will be sold for an estimated residual value of $12,000. The structures will be torn down.

Geologists estimate that 700,000 tons of ore can be extracted from the mine. After the ore is removed the land will revert back to the state of New Mexico.

The contract with the state requires Hecala to restore the land to its original condition after mining operations are completed in approximately four years. Management has provided the following possible outflows for the restoration costs:

Cash Outflow Probability

$ 500,000 40%

600,000 30%

700,000 30%

Hecalas credit-adjusted risk-free interest rate is 7%. During 2018, Hecala extracted 110,000 tons of ore from the mine. The companys fiscal year ends on December 31.

Required:

1. Determine the amount at which Hecala will record the mine.

2. Calculate the depletion of the mine and the depreciation of the mining facilities and equipment for 2018, assuming that Hecala uses the units-of-production method for both depreciation and depletion.

3. How much accretion expense will the company record in its income statement for the 2018 fiscal year?

4. Are depletion of the mine and depreciation of the mining facilities and equipment reported as separate expenses in the income statement?

5. During 2019, Hecala changed its estimate of the total amount of ore originally in the mine from 700,000 to 900,000 tons. Calculate the depletion of the mine and depreciation of the mining facilities and equipment for 2019 assuming Hecala extracted 140,000 tons of ore in 2019.

1.

	2019
Depletion
Depreciation of machinery
Depreciation of structures

2.

Depletion
Depreciation of machinery
Depreciation of structures

3.

Accretion Expense

4.

Separate expenses in the income statement

5.

	2019
Depletion
Depreciation of machinery
Depreciation of structures