Question

Flannery Company engages in the exploration and development of many types of natural resources. In the last two years, the company has engaged in the following activities: Jan. 1, Year 1 Purchased for $1,500,000 a silver mine estimated to contain 100,000 tons of silver ore. July 1, Year 1 Purchased for $1,700,000 a tract of timber estimated to yield 1,000,000 board feet of lumber, and the residual value of the land was estimated at $100,000.

Answer 1

Flannery Company capitalizes the silver mine at $15 per ton of ore and the timber tract at $1.60 per board foot.

Step-by-step explanation:

In evaluating the silver mine, the total cost of $1,500,000 needs to be distributed over the 100,000 tons of silver ore. The calculation is straightforward, resulting in $15 per ton of silver ore. This allocation reflects the cost incurred in acquiring and exploring the mine per ton of estimated silver ore. For the tract of timber, the total cost of $1,700,000 is allocated based on the estimated yield of 1,000,000 board feet of lumber.

This results in a cost of $1.70 per board foot. Additionally, the residual value of the land, $100,000, is accounted for separately.Separating the land's residual value ensures accurate capitalization of the timber's cost and recognizes the value of the land itself.

Therefore, the final capitalized cost for the silver mine is $15 per ton of silver ore, and for the tract of timber, it is $1.60 per board foot of lumber. These values accurately represent the allocation of costs for each respective natural resource, adhering to accounting principles and reflecting the specific characteristics of each asset.

Answer 2

The amount Flannery Company should capitalize as the cost of the silver mine and the tract of timber on its books is $3,200,000.

Step-by-step explanation:

Flannery Company should capitalize the costs incurred to acquire and prepare an asset for its intended use. For the silver mine, the capitalized cost includes the purchase price of $1,500,000. For the tract of timber, the capitalized cost includes the purchase price of $1,700,000. Therefore, the total capitalized cost for both assets is $1,500,000 + $1,700,000 = $3,200,000.

The capitalized cost represents the amount that will be recorded on the balance sheet as the cost of the assets. It is essential to include all costs necessary to get the asset ready for its intended use. In this case, the costs include the purchase prices of the silver mine and timber tract. These costs will be allocated and depreciated or depleted over the useful life of the respective assets. The residual value of the land in the timber tract is not considered in the calculation of capitalized cost, as it represents the estimated value of the land after the timber is harvested and does not contribute to the timber's cost.

In summary, the final capitalized cost for the silver mine and the tract of timber is $3,200,000, representing the total amount Flannery Company should recognize on its books for these natural resource assets.

Full Question:

Flannery Company engages in the exploration and development of various natural resources. Over the past two years, the company undertook the following activities:

- January 1, Year 1: Purchased a silver mine for $1,500,000, estimated to contain 100,000 tons of silver ore.

- July 1, Year 1: Acquired a timber tract for $1,700,000, projected to yield 1,000,000 board feet of lumber, with an estimated residual land value of $100,000.

As of December 31, Year 2, Flannery Company has not yet extracted any silver from the mine or any timber from the tract. How should these natural resources be reported on the company's balance sheet? Provide a detailed explanation, including the accounting principles involved, and specify the amounts at which the silver mine and timber tract should be recorded on the balance sheet as of December 31, Year 2.