Ferrous Minerals Ltd paid $2 million for a mine site and has spent a further $500 000 developing the property prior to commencing production.Ferrous estimates that the mine will produce 10 million tonnes of ore and that the land will have a final residual value of $75 000 for sale and use as a waste disposal site.It is also believed that to extract the last 2 million tonnes of ore will require further drilling and excavation work at a cost of an extra $200 000.What is the amortisation rate that should be used to write-off pre-production costs in the first year of production (when it is estimated that 1 million tonnes of ore will be mined):

Question

Quizplus · Accepted Answer

To calculate the amortisation rate, we need to first calculate the total cost of the mine site and the development costs:

Total Cost = $2 million + $500,000 + $200,000 = $2.7 million

Next, we need to subtract the residual value of the land at the end of its useful life:

Depreciable Cost = Total Cost - Residual Value
Depreciable Cost = $2.7 million - $75,000 = $2.625 million

Finally, we divide the depreciable cost by the estimated amount of ore to be extracted:

Amortisation Rate = Depreciable Cost / Estimated Ore
Amortisation Rate = $2.625 million / 10 million tonnes = $0.2625 per tonne

Therefore, the answer is B, 26.25 cents per tonne.

Ferrous Minerals Ltd Paid $2 Million for a Mine Site