Question

Pharoah products limited leases property on which copper has been discovered. the lease provides for an immediate payment of $471,920 to the lessor before drilling has begun and an annual rental of $54,940. in addition, the lessee is responsible for cleaning up the waste and debris from drilling and for the costs associated with reconditioning the land for farming when the mine is abandoned. it is estimated that the legal obligation related to cleanup and reconditioning has a present value of $45,820. pharoah products has publicly pledged an additional $29,600 (present value) to reclaim the area surrounding the mine. pharoah products prepares financial statements in accordance with ifrs.

a. determine the amount that should be capitalized in the mineral resources asset account as a result of the lease agreement.
b. determine the amount that should be capitalized in the mineral resources asset account as a result of the lease agreement. assume pharoah products prepares financial statements in accordance with ASPE.

Answer 1

Under IFRS, Pharoah Products Limited should capitalize a total of $547,340 in the mineral resources asset account, including the initial payment and present values of both legal obligations and additional pledged amounts for environment reclamation.

Step-by-step explanation:

To determine the amount that should be capitalized in the mineral resources asset account as a result of the lease agreement under both IFRS and ASPE, we'll calculate the sum of all the initial and estimated costs. Under IFRS, the assets recognized at the commencement of the lease include the initial payment made and also any future obligations that are legal or constructive in nature. Therefore, the capitalized cost is the sum of the initial payment ($471,920), the present value of the legal obligation for cleanup and reconditioning ($45,820), and the present value of the additional pledged amount for reclaiming the surrounding area ($29,600). This totals to $547,340. Under ASPE, the approach may differ regarding the recognition of future obligations unless they are contractual or legal at the commencement date.