Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,150,000 in 2021 for the mining site and spent an additional $630,000 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)

Cash flow Probability
1 $330,000 25%
2 430,000 40%
3 630,000 35%

To aid extraction, Jackpot purchased some new equipment on July 1, 2021, for $150,000. After the copper is removed from this mine, the equipment will be sold. The credit-adjusted, risk-free rate of interest is 10%.

Required:
a. Determine the cost of the copper mine.
b. Prepare the journal entries to record the acquisition costs.

Answer 1

Answer:

a. Determine the cost of the copper mine.

• $2,104,430

b. Prepare the journal entries to record the acquisition costs.

Date X, 2021, acquisition of copper mine

Dr Copper mine 2,104,430  

    Cr Cash 1,780,000

    Cr Asset retirement liability 324,430

July 1, 2021, acquisition of mining equipment

Dr Equipment 150,000

    Cr Cash 150,000

Explanation:

estimated restoration costs = ($330,000 x .25) + ($430,000 x .4) + ($630,000 x .35) = $475,000

now we must adjust the restoration cost and determine its present value = $475,000 x 0.68301 (present value factor, 10%, 4 periods) = $324,430

total cost of copper mine = purchase cost + preparation costs + restoration costs = $1,150,000 + $630,000 + $324,430 = $2,104,430