Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,400,000 in 2021 for the mining site and spent an additional $680,000 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) (Use appropriate factor(s) from the tables provided.) HNM Cash Outflow $380,000 480,000 680,000 Probability 25% 40% 35% To aid extraction, Jackpot purchased some new equipment on July 1, 2021, for $200,000. 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

Calculation of restoration cost
	cash flow	probability	amount
1	380000	25%	95000
2	480000	40%	192000
3	680000	35%	238000
	TOTAL		525000
	PRESENT VALUE n=4, i=12%		0.6355
	restoration cost		333638
Cost of copper mine
minning site		1400000
development cost		680000
restoration cost		333638
Cost of copper mine		2413638
2) Journal entries
Particulars		Debit	Credit
copper mine		2413638
cash			2080000
assets retirement liability			333638
(to record acquisition cost of mine)
equipment		200000
cash			200000
(to record purchase of equipment)