Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,700,000 in 2021 for the mining site and spent an additional $740,000 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		440,000			25%
2		540,000			40%
3		740,000			35%

To aid extraction, Jackpot purchased some new equipment on July 1, 2021, for $260,000. 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

	Restoration costs	Cash outflow	Probability	Possible Restoration Cost
	Possibility 1	4,40,000	25%	110000
	Possibility 2	5,40,000	40%	216000
	Possibility 3	7,40,000	35%	259000
				585000
	Table or Calulator Function PVF (10%, 4 Years )			PV of $ 1
			n=	4
			i=	10%
	Present value of probable Restoration costs ( $ 585,000 x 0.68301 )			$ 399,561
	Cost of copper mine :
	Minning site	$ 1,700,000
	Development Costs	$ 740,000
	Restoration costs	$ 399,561
	Cost of copper mine	$ 2,839,561
Transaction	Account Titles and Explanations	Debit	Credit
1	Copper mine	$ 2,839,561
	Cash               ( $ 1,700,000 + $ 740,000)		$ 2,440,000
	Asset retirement liability		$ 399,561
	(To record the acquisition Costs )
2	Equipment	$ 260,000
	Cash		$ 260,000
	(To record the Purchase )