Chapter 9 - q2

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University of Alberta *

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351

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Finance

Date

Apr 3, 2024

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docx

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1

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EXERCISE 9–2 Argyris Mining Inc. completed construction of a new silver mine in 2020. The cost of direct materials for the construction was $2,200,000 and direct labour was $1,600,000. In addition, the company allocated $250,000 of general overhead costs to the project. To finance the project, the company obtained a loan of $3,000,000 from its bank. The loan funds were drawn on February 1, 2020, and the mine was completed on November 1, 2020. The interest rate on the loan was 8% p.a. During construction, excess funds from the loan were invested and earned interest income of $30,000. The remainder of the funds needed for construction was drawn from internal cash reserves in the company. The company has also publicly made a commitment to clean up the site of the mine when the extraction operation is complete. It is estimated that the mining of this particular seam will be completed in ten years, at which time restoration costs of $100,000 will be incurred. The appropriate discount rate for this type of expenditure is 10%. Required:  Determine the cost of the silver mine to be capitalized in 2020. EXERCISE 9–2 The following costs would be capitalized with respect to the mine: Direct material  $2,200,000 Direct labour   1,600,000 Interest ( 3,000,000×8%×9÷12 )   180,000 Less interest on excess funds   (30,000) Present value of restoration costs (FV=100,000, I=10, N=10)   38,554 Total cost capitalized   3,988,554
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