ASR Spring 2016

ASR Topic 5 Tutorial Question Natural Resources

Question 1 Information
ABC commenced operations on the 1st of January 2014. During 2014, it explored 2 areas and
incurred the following Exploration and Evaluation costs:
A
B

$25m
$11m

By year-end gold is discovered at Site A and B is abandoned due to a lack of economically

recoverable reserves. 80% of the costs spent at A are tangible in nature, whilst the remainder are
intangible. At B, $6m are tangible and $5m are intangible.
Development costs of $16m are incurred during 2015 at A, $10m of which relates to PPE and $6m
relates to intangible assets. These amounts are to be depreciated/amortised on a production basis.
Development concludes in 2015 and production commences in January 2016
Site A is estimated to have 150,000 ounces of gold.
In 2016 ABC extracts 35,000 ounces of gold. Production costs are $950/ounce production costs and
sells 28,000 ounces. Gold is presently selling for $1500/ounce.
Provide journal entries using area-of-interest method:

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ASR Spring 2016

Question 1 Solution
Provide journal entries using area-of-interest method (assuming capitalised):
2014

EXPLORE
Dr E&E Assets Site A 25
Dr E&E assets Site B 11
Cr Cash/payables

PRE-PRODUCTION PHASE

E&E PHASE
36

2014
DECIDE - RECLASSIFY OR IMPAIR
Dr Assets under construction PPE
Dr Assets under construction intangibles
Cr E&E assets site A
Dr Impairment loss E&E assets
Cr E&E assets site B
2015
CONSTRUCT OTHER COMPONENTS
Dr Assets under construction - PPE
Dr Assets under construction intangibles
Cr Cash/payables

20
5
25
11
11

10
6
16

2016
RECLASSIFY
Dr PPE Site A
30
Dr Intangible mineral assets
11
Cr Assets under construction PPE
Cr Assets under construction intangibles
PRODUCE
Dr Inventory gold
Acc depreciation PPE Site A
(30/150,000*35,000)
Acc amortisation intangibles Site A
(11/150,000*35,000)
Cr Cash/payables
(950*35,000)
SELL
Dr Cash/receivables
Cr Sales revenue
(28,000*1500)
Dr Cost of goods sold
Cr Inventory gold
(42.81)/35,000*28,000

CONSTRUCTION PHASE

PRODUCTION PHASE
30
11

42.81
7
2.56
33.25

42
42

34.248
34.248

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Question 2 Information
AB Farms Ltd farm sheep from which wool is harvested to sell to local ugg boot manufacturers. On the 1st
of January 2013, AB Farms Ltds sheep had a fair value of $3,250,000. During the year ended 31st
December 2013, $125,000 was spent on feed, and $15,000 was spent on vet bills.
Wool with a market value of $535,000 was harvested at a cost of $42,000. Sales commissions of $25,000
were expected to be paid on the sale of the wool. On the 31st of December 2013, AB Farm Ltds sheep
had a fair value of $3,300,000.

Question 2 Solution (assuming expensing all costs)

Dr Feed expense
Dr Vet bills expense
Dr Harvest expense
Cr Cash

$125,000
$15,000
$42,000
$182,000

Dr Wool (inventory)
Cr Gain on recog.

$510,000
$510,000

Dr Sheep (Biological asset)

Cr Gain on FV change

$50,000
$50,000

Note: there are multiple ways to do this, all of which will get you the same profit, and asset
values.

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