Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,250,000 in 2021 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 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	$	350,000			25	%
2		450,000			40	%
3		650,000			35	%

To aid extraction, Jackpot purchased some new equipment on July 1, 2021, 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

Answer
1
Computation of Restoration cost
Cash flow	Probability	total
350000	25%	$        87,500
450000	40%	$      180,000
650000	35%	$      227,500
total		$      495,000
present value 10%, n=4		0.68301
Restoration cost(495000*0.68301)		$      338,090
Compuation of Copper mine cost
Mining site	$      1,250,000
Development cost	$         650,000
Restoration costs	$         338,090
Cost of copper mine	$      2,238,090

2
Event 1
General Journal	Debit	Credit
Copper mine	$      2,238,090
Cash		$     1,900,000
Asset retirement liability		$        338,090
event 2
General Journal	Debit	Credit
Equipment	$         170,000
Cash		$        170,000