Question

Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled $7.3 million. After the silver is extracted in approximately five years, Smithson is obligated to restore the land to its original condition, including constructing a wildlife preserve. The company's controller has provided the following three cash flow possibilities for the restoration costs: (1) $670,000, 10% probability; (2) $720,000, 50% probability; and (3) $820,000, 40% probability. The company's credit-adjusted, risk-free rate of interest is 5%. (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.) What is the book value of the asset retirement liability at the end of one year? Assuming that the actual restoration costs incurred after extraction is completed are $766,000, what amount of gain or loss will Smithson recognize on retirement of the liability? (Do not round intermediate calculations. Enter your answer in whole dollars.) Liability

Answer 1

Asset Pestoration Lability Amounts Probabilele (axb) $670,000 10% $67,000 720,000 50% 369 000 820,000 40% 328,000 $ 755,000 Risk free rate of Interest 5% Value of liability - $755,000 ni (1+0.05)5 Present >> $ 755,000 (1+0.015) - $ 755,000 X 0.7835 $591,542.5 Capitalization Journal Entry for Silver Mine ($ 7,300,000 + 591, 5u2.) $789,542.5 To To Cash Asset Restora hon liability $7,300,000 $591,549.s At the end of the one year n At the begining of the Year $591,542.5 Interest for 1 year (591,542.585%) & 29,577 Asset Restoration liability @ end of Yegor & $62), 119.5

Book Value of the Asset Restoration liability end of 5 years >> $ 755,000 > 766,000) Actual Expense Journal Loss on Asset Restoration ($11,000) Entry Particulars o Debit . Credit Asset Restoration Lability$ 755,000 Loss on Asset Restoration $ 11,000 Liability $ 766, OOD To Cash