Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,850,000 in 2018 for the mining site and spent an additional $770,000 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	$	470,000			25	%
2		570,000			40	%
3		770,000			35	%

To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $290,000. 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

1. COST OF COPPER MINE CALCULATION = $ 30,40,051

Mining site                     $ 18,50,000

Extraction Cost             $ 7,70,000

Restoration costs           $ 4,20,051

$ 30,40,051

Restoration costs calculation

$ 470000 × 25%            = 117500

$ 570000 × 40%            = 228000

$ 770000 × 35%            = 269500

Total                              = $ 615000

Present Value                 = $ 615000 × 0.68301

= $ 4,20,051

*Present value of $1, n = 4, i = 10% (from PV of $1)

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

1.Copper mine        A/c                                  Dr     $ 30,40,051

To Cash A/c Cr $ 26,20,000

To Asset retirement liability A/c Cr $ 4,20,051

2 .Equipment           A/c                                 Dr     $ 2,90,000

To Cash A/c Cr $ 2,90,000