Question

Exercise 10-4 (Static) Cost of a natural resource; asset retirement obligation [LO10-1] Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,000,000 in 2021 for the mining site and spent an additional $600,000 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: (EV of $1. PV of $1. EVA of $1, PVA of $1 FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Probability Cash Outflow $300,000 25% 1 40% 2 400,000 600, в00 35% 3 To aid extraction, Jackpot purchased some new equipment on July 1, 2021, for $120,000. 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

Computation of Cost of Copper Mine
Particular	Amount
Cash Paid for Mining site	$1,000,000
Additional Development cost	$600,000
Restoration cost (workingNote)	$303,935
Total Cost of Copper Mines	$1,903,935
Working Note : Computation of Expected Restoration cost
($ 300,000 * 25 % + $400,000 *40% + $ 600,000*35%) *0.6830 = $303,935

Journal Entry- Jackpot Mining Company
Date	Account Tittle	Debit	Credit
2021	Copper Mine	$1,903,935.00
	Cash (1000000+600000)		$1,600,000.00
	Assets Retirement Liability		$303,935.00
	To record acquisition costs of the mine
1-Jul-21	Equipment	$120,000.00
	Cash		$120,000.00
	To record purchase of equipment