Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,750,000 in 2021 for the mining site and spent an additional $750,000 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.)

	Cash Outflow			Probability
1	$	450,000			15	%
2		550,000			45	%
3		750,000			40	%

To aid extraction, Jackpot purchased some new equipment on July 1, 2021, for $270,000. After the copper is removed from this mine, the equipment will be sold. The credit-adjusted, risk-free rate of interest is 12%.

Required:
2. Prepare the journal entries to record the acquisition costs of the mine and the purchase of equipment.

Prepare journal entries for :

a. Record the acquisition costs of the mine.

b. Record the purchase of equipment.

Answer 1

Acquisition cost of site Add: Additional cost Add: Restoration cost Total Copper Mine Cost = = & $1,150,000 $750,000 $390,845 = $2890,845 401 calculation of Restoration cost of site :- Cash Outflow Probability Expected value 450,000 15.1. 67,500 550,000 45.. 247,500 750,000 3,00,000 Expected cash outflow $615,000 Present value of cash outflow after 4 years years = Cash outflow & Present value factor one of 4th year ,000 y 0.63552 = $ 390,845 " ca) Copper mine Cash Debit credit $ 2,500,000 $ 22,500,000 copper mine $ 390,845 Provision for Restoration Liability $390,845 $ 270,000 Equipment Cash $ 270,000

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