Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,650,000 in 2018 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 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	$	430,000			15	%
2		530,000			45	%
3		730,000			40	%

To aid extraction, Jackpot purchased some new equipment on July 1, 2018, 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. Determine the cost of the copper mine.

= $16,50 000 (Mining site) + $730000 (Development costs) + $3,77,825 (Restoration costs)

= $27,57,825

cost of the copper mine = $27,57,825

***Restoration costs

= [($430000x15%)+($530000x45%)+($730000x40%) ] x 0.635 (PVF12%,4Year)

= $3,77,825

2. Prepare the journal entries to record the acquisition costs of the mine and the purchase of equipment.

Dr         Copper mine A/c      $27,57,825                                            

Cr          Cash    A/c                                               $23,80,000

Cr          Asset retirement liability   A/c                $3,77,825  

Dr         Equipment    A/c            $2,50,000         

Cr          Cash A/c                                                   $2,50,000