Question

  

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,650,000 in 2021 for the mining site and spent an additional $730,000 to prepare the mine for extraction of the copper. After the copper is extracted in approximately four years, the company is required to restore the land to its original condition, including repaving of roads and replacing a greenbelt. The company has provided the following three cash flow possibilities for the restoration costs: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

	Cash Outflow			Probability
1	$	430,000			15	%
2		530,000			45	%
3		730,000			40	%

To aid extraction, Jackpot purchased some new equipment on July 1, 2021, for $250,000. After the copper is removed from this mine, the equipment will be sold. The credit-adjusted, risk-free rate of interest is 12%.

Required:
1. Determine the cost of the copper mine.
2. Prepare the journal entries to record the acquisition costs of the mine and the purchase of equipment.

Answer 1

1. Cost of copper mine
Mining site	$1,650,000
Development cost	$730,000
Restoration cost - Refer Note 1	$378,123
Cost of mine	$2,758,123
Note 1: Computation of Restoration cost
	Cash outflow	Probability	Probable restoration cost
Possibility 1	$430,000	15%	$64,500
Possibility 2	$530,000	45%	$238,500
Possibility 3	$730,000	40%	$292,000
		Total	$595,000
		Present value factor @12%, 4 years	0.6355
		Present value of probable restoration cost	$378,123
2. Journal Entries
S. No.	Account Title	Debit ($)	Credit ($)
2021	Mining Site … Dr	$2,758,123
	To Cash		$2,380,000
	To Asset Retirement Obligation		$378,123
	(Being purchase of mining asset recorded)
July 1, 2021	Equipment … Dr	$250,000
	To Cash		$250,000
	(Being purchase of equipment recorded)