Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,250,000 in 2018 for the mining site and spent an additional $650,000 to prepare the mine for extraction of the copper. After the copper is extracted in approximately 4 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	$	350,000			25	%
2		450,000			40	%
3		650,000			35	%

To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $170,000. After the copper is removed from this mine, the equipment will be sold. The credit-adjusted, risk-free rate of interest is 10%.

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

Requirement-1, The Cost of copper mine.

Amount paid for mining site = $12,50,000

Amount paid for prepare the mine for extraction of the copper = $650,000

Net Expected Cash outflow = [$350,000 x 25%] + [$450,000 x 40%] + [$650,000 x 35%] = $495,000

Present Value of Net cash Outflow = Cash Flow x [PVIF 10%, 4 Years]

= $495,000 x 0.68301

= $ 3,38,092

Therefore, The Cost of copper mine

= $12,50,000 + 650,000 + 338,092

= $ 22,38,092

Requirement-2, The journal entries to record the acquisition costs of the mine and the purchase of equipment.

	Accounts Tittles and Explanations	Debit ($)	Credit ($)
1	Copper Mine A/c	22,38,092
	To Cash A/c		19,00,000
	To Asset Retirement Liability A/c		3,38,092
	[Record of Cost of copper mine]
2	Equipment A/c	170,000
	To Cash A/c		170,000
	[Purchase of some new equipment on July 1, 2018, for $170,000]