Which method would result in the lowest profit in the first year? Which would result in the highest?

INTRODUCTION

Brighton Mines is a company that owns three mines in northern British Columbia. They are responsible for the extraction and refining of ore in order to produce precious metals. Many different long-lived assets are used throughout their operations.

PART A:

The company is looking to purchase a new truck for the transportation of the ore harvested from the mine to the refining facility. The equipment manager has found a truck for sale that will have a purchase price of $120,000. Brighton will have to pay $2,000 for the truck to be painted with the Brighton Mines logo, and will have to equip the truck with a different truck bed to handle the heavy ore, which will cost $20,000. The truck bed will have the same useful life as the truck once installed. Brighton will also have to pay $9,000 to purchase the first year of insurance on the truck and a provincial eco-tax of $5,000, the eco-tax cannot be recovered.

 

The truck was purchased on April 1st 2022 and all required costs, included above were paid.

 

Instructions:

1. Record the purchase of the truck on April 1st

GENERAL JOURNAL
DATE		PARTICULARS	PR	DEBIT	CREDIT

PART B:

 

Equipment used in the refining of the ore was purchased on June 1st in 2020 for a total cost of $800,000. This equipment was estimated to have a useful life of either 15 years or 10 million tonnes of ore processed, with a residual value of $50,000. The equipment processed 600,000 tonnes of ore in 2020, 1,100,000 in 2021, and 900,000 in 2022. Brighton has a December 31st year end and pro-rates all of their depreciation to the nearest month.

Instructions:

1. Calculate the first three years of depreciation using the:
   1. Straight-Line Method
   2. Diminishing-Balance Method (with the double-declining rate)
   3. Units of Production Method
2. Record how the entry for depreciation would look for any one of the above amounts
3. Which method would result in the lowest profit in the first year? Which would result in the highest?

 

Straight-line

Year	Depreciable Amount	Rate	Depreciation Expense	Accumulated Depreciation	Carrying Amount	Show calculations here
					800,000.00	↓
2020
2021
2022

Double-Diminishing

Year	Depreciable Amount	Rate	Depreciation Expense	Accumulated Depreciation	Carrying Amount
					800,000.00
2020
2021
2022

 

Units of production

Cost per unit:

Year	Depreciable Amount	Units	Depreciation Expense	Accumulated Depreciation	Carrying Amount
					800,000.00
2020
2021
2022

 

Date	Particulars	Debit	Credit

 

Which method would result in the lowest profit in the first year? Which would result in the highest?

PART C:

A partial balance sheet for Brighton Mines can be found below:

Brighton Mines

Balance sheet (partial)

December 31, 2020

Ore Processing Plant 5,000,000

Accumulated Depreciation – Ore processing Plant 1,500,00 3,500,000

The company found out on December 31st that the ore processing plant listed above is sitting near a mine that had less ore than was expected, therefore its value has decreased. An independent valuator was called in and determined the recoverable amount would be $2,500,000.

The plant was purchased in January of 2018 and has been depreciated using the straight-line method. It has a total useful life of 10 years at which time it would have no residual value.

Instructions:

1. Record impairment, if necessary, on December 31st, 2020
2. Calculate and record the revised depreciation for December 31st, 2021
3. On March 1st, 2022 the company considered getting rid of this plant. Record the disposal of this plant on March 1st under each of the following scenarios (imagine each of the following is occurring independently of the other scenarios)

1. The plant was scrapped
2. The plant was sold for $1,300,000 cash
3. The plant was sold for $4,000,000 cash
4. An outside company offered to trade the plant for another plant further north. They are offering to give you $2,000,000 towards the purchase of the northern new plant in exchange for the old plus $6,000,000 cash. An independent valuator tells you that your current plant has a current fair-value of $1,700,000.

GENERAL JOURNAL					PAGE
DATE		PARTICULARS	PR	DEBIT		CREDIT	Show calculations here
							↓

 

PART D:

On April 1st, 2020, Brighton Mines purchased a patent for a new technology to be used in the refinement of their mined ore. They paid $300,000 for the patent.

Instructions:

1. Record the purchase of the patent
2. The patent has an estimated useful life of 10 years, at which time it will have no residual value. Record the amortization on the patent on December 31, 2020
3. On January 1st, 2021 a team set up to evaluate our assets determined that the patent will only provide us with $250,000 of fair value in the future. Record any necessary impairment of the patent.
4. Record the amortization on the patent on December 31, 2021

GENERAL JOURNAL					PAGE
DATE		PARTICULARS	PR	DEBIT		CREDIT		Show calculations here
								↓

PART E:

The following is information about Brighton Mines for the past three years.

	2020	2021	2022
Sales	1,200,000	1,500,000	2,000,000
Net Profit	400,000	450,000	700,000
Total Assets	5,000,000	6,500,000	7,250,000

Instructions:

1. Calculate the asset turnover for 2021 and 2022
2. Calculate the return on assets for 2021 and 2022
3. Briefly comment on each of the numbers calculated: What does each number mean? What is the current trend in both these numbers?

	2021	2022
Asset Turnover

 

	2021	2022
Return on Assets

 

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