Calculate the depletion of the mine

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Question - On May 1, 2021, 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 $9.8 million. Additional costs and purchases included the following:

Development costs in preparing the mine$3,000,000 Mining equipment 150,400 Construction of various structures on site 58,500.

After the minerals are removed from the mine, the equipment will be sold for an estimated residual value of $10,000. The structures will be torn down.

Geologists estimate that 780,000 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 $580,000 30% 680,000 30% 780,000 40%

Hecala's credit-adjusted risk-free interest rate is 8%. During 2021, Hecala extracted 118,000 tons of ore from the mine. The company's fiscal year ends on December 31.


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 2021, 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 2021 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 2022, Hecala changed its estimate of the total amount of ore originally in the mine from 780,000 to 980,000 tons. Calculate the depletion of the mine and depreciation of the mining facilities and equipment for 2022 assuming Hecala extracted 148,000 tons of ore in 2022.

Reference no: EM132441210


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