Question

Copper products limited acquired property on which copper has been discovered. the terms of the acquisition call for an immediate payment of $472,000 together with an annual royalty of 1% of copper sold. in addition, the company is responsible for cleaning up the waste and debris from drilling and for the costs of 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 $46,000. copper products has publicly pledged an additional $30,000 (present value) to reclaim the area surrounding the mine. copper 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) Would the amount provided in part (a) differ if Copper Products prepares financial statements in accordance with ASPE?
(c) Prior to entering into the lease agreement, assume that Copper Products had total debt of $580,000 and total assets of $1,000,000. Also assume that the immediate payment of$472,000 was paid upfront in cash. From the perspective of a creditor, discuss the effect of the lease agreement on Copper Products' debt to total assets ratio. Assume that Copper Products follows IFRS.

Answer 1

The capitalized cost in the Mineral Resources asset account should include the initial payment of $472,000, cleanup and reconditioning obligations of $46,000, and land reclamation pledge of $30,000, totaling $548,000 (c). The amount capitalized should be similar under ASPE, and the lease agreement would lead to an increase in Copper Products' debt to total assets ratio following the initial cash payment.

Step-by-step explanation:

To answer part (a) of the question on what amount should be capitalized in the Mineral Resources asset account due to the lease agreement, following IFRS guidelines, Copper Products Limited should capitalize the initial payment of $472,000. Furthermore, the present value of the legal obligations for cleanup and reconditioning, which totals $46,000, and the additional pledged amount for land reclamation of $30,000 (present value), should also be included. These bring the total capitalized cost to $548,000. Royalties are typically expensed as incurred and not capitalized.

For part (b), the accounting treatment under Accounting Standards for Private Enterprises (ASPE) can differ from IFRS in certain areas, but when it comes to the initial measurement of an asset, they are generally similar. Therefore, it is likely that the same amount would be capitalized as under IFRS, unless specific guidance under ASPE indicates otherwise.

Regarding part (c), after entering into the lease agreement and assuming IFRS guidelines are followed, Copper Products' debt to total assets ratio would increase following the initial cash payment. Prior to the agreement, the ratio was 58% ($580,000 / $1,000,000). However, after the payment of $472,000, total assets would decrease, assuming there were no other changes in the balance sheet, therefore increasing the ratio. As the company capitalizes the initial payment and additional obligations, assets would increase by the same amount, thereby partially offsetting the impact on the ratio.