THESE FACTS PERTAIN TO THIS QUESTION AND THE FOURQUESTIONS THAT FOLLOW
On March 31, 2008, Kellwood acquired a gold mine for$16,000,000. At the time of acquisition, the Proven and Probablegold reserves of the mine were estimated to be 1,640,000 ounces.During the period April 1, 2008 through December 31, 2008, Kellwoodincurred intangible development costs of $8,395,000; tangibleequipment costs of $54,200; and exploration costs of $565,000.Kellwood has taken the position that the exploration costs are tobe expensed, rather than capitalized. Kellwood estimates thatfuture restoration costs will amount to $1,720,000 to be paid onthe last day of the mine’s estimated life, and that the salvagevalue of the mine will be $125,000. In accordance with GAAP,Kellwood’s management determines the value of its asset retirementobligations using the Credit-Adjusted Risk-free Rate of 3percent.
Following development, the mine was placed in service on January1, 2009. Since that time, no additional development or explorationcosts have been incurred. For all periods of operation throughDecember 31, 2011, Kellwood extracted 656,000 ounces of the totalestimated reserves. As of December 31, 2011, 32,800 of these ouncesremained in inventory.
During December 2011, the price of gold dropped and is notexpected to recover in the foreseeable future. Accordingly, onJanuary 1, 2012, Kellwood tested whether or not the mine wasimpaired. After implementing every possible cost cutting measure,Kellwood was able to establish the following projected futurecashflows for the remaining life of the mine. The company usedthese cashflows for calclulating the fair value of the mine:
Year 2012 net cash INFLOW of $4,573,000
Year 2013 net cash INFLOW of $3,102,000
Year 2014 net cash OUTFLOW of $(4,265,000)
Year 2015 net cash INFLOW of $2,951,000
Year 2016 net cash INFLOW of $3,393,000
Year 2017 net cash INFLOW of $5,312,000
Year 2018 net cash OUTFLOW of $(2,279,000)
Year 2019 net cash INFLOW of $7,376,000
All cashflows are deemed to occur at the end of each respectiveyear. The restoration costs of $1,720,000 are included in the finalnet cashflow shown above. However, GAAP REQUIRES such costs to beEXCLUDED from future cash flows for purposes of determining theimpairment of a long-lived asset. Thus, the final cash flow shouldbe adjusted for this amount when determining the Net Present Valueof the mine’s future cash flows. The company uses a discount rateof 3 percent to determine the net present value of the mine’sfuture cashflows.
If impaired, what is the amount of the impairment lossthat Kellwood should record on its investment in the mine on its2012 income statement?
What is the total cost of the mine placed in service onJanuary 1, 2009?
Rounded to the nearest penny, what is the mine’sdepletion rate per ounce of gold extracted?
What is the total depletion expense that should havebeen recorded in Cost of Goods Sold for all periods throughDecember 31, 2011?
According to the standards governing the impairment oflong-lived assets, the mine is impaired. True, False
Please be detailed; Thank you!!