Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,500,000 in 2018 for the mining site and spent an additional $700,000 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	$	400,000			25	%
2		500,000			40	%
3		700,000			35	%

To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $220,000. 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
	Mining Site			=	$     15,00,000
	Development Cost			=	$       7,00,000
	Restoration Cost*			=	$       3,72,240
	Cost of Copper Mine			=	$     25,72,240
	*Restoration Cost
	$ 4,00,000	X	25%	=	$       1,00,000
	$ 5,00,000	X	40%	=	$       2,00,000
	$ 7,00,000	X	35%	=	$       2,45,000
					$       5,45,000
	Present Value of Restoration Cost			=	$       3,72,240
	($545000 X 0.0.68301)
	Present Value of $ 1, n=4, i=10% (from PV of $ 1)
2	Event	Particulars	Debit	Credit
	1	Copper mine	$ 25,72,240
		Cash ($1500,000 + $700,000)		$ 22,00,000
		Assets retirement liability		$   3,72,240
		(Being acquisition of mine recorded)
	2	Equipment	$   2,20,000
		Cash		$   2,20,000
		(Being Equipment purchased recorded)