(Preparing amortization schedules, LO 2, 3, 4, 6) In July 2002 Yreka Palladium Mines Inc. (Yreka), a public company, began operation of its new palladium mine.

Geologists estimate that the mine contains about 235,000 ounces of palladium.

Yreka incurred the following capital costs in starting up the mine:

The exploration and development costs were incurred to find the mine and prepare it for operations. The mine extraction equipment should be useful for the entire life of the mine and Yreka should be able to sell the equipment for $1,500,000 when the mine is exhausted in ten years. The buildings are expected to last much longer than the ten-year life of the mine, but they will not be useful once the mine is shut down.

The production engineers estimate that all the palladium can be removed from the mine over ten years. They estimate the following year-by-year production for the mine:

Required:

a. Show the journal entries necessary to record the purchase of the extraction equipment and the construction of the buildings.

b. Prepare amortization schedules using the straight-line, declining balance (20%
per year), and unit-of-production methods for the three types of capital costs.

c. Which method would you recommend that Yreka use to amortize its capital assets? Explain.

d. The mine is viable as long as the cash cost of extracting the palladium remains below the price Yrkea can obtain for its palladium. If the price falls below the cash cost of extraction, it may be necessary to close the mine temporarily until prices rise. What would be the effect on amortization if the mine were temporarily shut down?

e. Under some circumstances it may become necessary to shut the mine permanently. How would you account for the capital assets if the mine had to be shut down permanently? Show the journal entries that you would make in regard to the capital assets in the event the mine had to close permanently. State any assumptions you make.

Transcribed Image Text:

Exploration and development Mine extraction equipment Buildings $18,000,000 22,000,000 3,000,000