On 1 July 2002 Honies Ltd commenced an operation to extract iron ore from two sites believed to have potential in Northern Australia. During the financial period ended 30 June 2003 the following costs were incurred.

The Eastern site is found not to be economically viable and is abandoned in the second half of 2003. Development costs of $10 million are incurred at the Western site. The reserves at this site are estimated to be 90,000 tonnes. The market price is currently $900 per tonne. In the financial year ended 30 June 2004, 10,000 tonnes are extracted with associated production costs of $1 million and 8,000 tonnes are sold at the market price. There are no effective limits on the time over which Honies Ltd may extract the ore. What are the journal entries to record the relevant transactions and events for 2003 and 2004 using the full-cost method (round to the nearest $10,000)?
E) None of the given answers.

Question

On 1 July 2002 Honies Ltd commenced an operation to extract iron ore from two sites believed to have potential in Northern Australia. During the financial period ended 30 June 2003 the following costs were incurred.

The Eastern site is found not to be economically viable and is abandoned in the second half of 2003. Development costs of $10 million are incurred at the Western site. The reserves at this site are estimated to be 90,000 tonnes. The market price is currently $900 per tonne. In the financial year ended 30 June 2004, 10,000 tonnes are extracted with associated production costs of $1 million and 8,000 tonnes are sold at the market price. There are no effective limits on the time over which Honies Ltd may extract the ore. What are the journal entries to record the relevant transactions and events for 2003 and 2004 using the full-cost method (round to the nearest $10,000)?
E) None of the given answers.

Quizplus · Accepted Answer

- Journal entries for 2003:
1) Debit Development costs - Eastern site $25,000,000
Credit Cash $25,000,000 (to record exploration cost)
2) Debit Development costs - Western site $10,000,000
Credit Cash $10,000,000 (to record development cost)
3) Debit Accumulated losses $35,000,000
Credit Development costs - Eastern site $25,000,000
Credit Development costs - Western site $10,000,000 (to record write-off of abandoned site costs)
- Journal entries for 2004:
4) Debit Production costs expense $1,000,000
Credit Cash $1,000,000 (to record production costs)
5) Debit Inventory $7,200,000
Credit Revenue $7,200,000 (to record sale of 8,000 tonnes of iron ore at market price)
Note: The full-cost method requires all exploration, development and production costs to be capitalized as an inventory asset until the commodity is sold. The inventory is then recorded at cost (production cost plus development cost per tonne) when sold.

On 1 July 2002 Honies Ltd Commenced an Operation to Extract