On 1 April 2008, Ulladulla Mining Ltd assessed that its Mollymook area of interest contained economically recoverable reserves of 50,000 ounces of gold. On the same day the entity installed the following assets:

The above assets were ready for use on 1 July 2008. Ulladulla Mining Ltd expects to extract the entire reserves in 5 years. For the year ending 30 June 2009 the entity had extracted 5,000 ounces of gold.
What is the total depreciation/amortisation expense for the capitalised development costs for the year ending 30 June 2008?

Question

On 1 April 2008, Ulladulla Mining Ltd assessed that its Mollymook area of interest contained economically recoverable reserves of 50,000 ounces of gold. On the same day the entity installed the following assets:

The above assets were ready for use on 1 July 2008. Ulladulla Mining Ltd expects to extract the entire reserves in 5 years. For the year ending 30 June 2009 the entity had extracted 5,000 ounces of gold.
What is the total depreciation/amortisation expense for the capitalised development costs for the year ending 30 June 2008?

Quizplus · Accepted Answer

The total depreciation/amortisation expense for the capitalised development costs is calculated using the units-of-production method.

First, we need to calculate the depreciation rate per unit of production: 
Depreciation rate per unit = (capitalised development costs - salvage value) / total units of production 
= ($10,800,000 - $900,000) / 50,000 ounces 
= $198 per ounce

For the year ending 30 June 2009, the entity extracted 5,000 ounces of gold. Therefore, the depreciation/amortisation expense for the year is: 
Depreciation/amortisation expense = depreciation rate per unit * units extracted during the year 
= $198/ounce * 5,000 ounces 
= $990,000

However, the assets were ready for use on 1 July 2008, so the depreciation/amortisation expense for the year ending 30 June 2009 is the portion of the year from 1 July 2008 to 30 June 2009: 
Depreciation/amortisation expense = $990,000 * (365 days / 365 days) 
= $990,000

Therefore, the total depreciation/amortisation expense for the capitalised development costs for the year ending 30 June 2008 is $990,000. None of the given answers match this value, but the closest option is B, which is $483,750.

On 1 April 2008, Ulladulla Mining Ltd Assessed That Its