Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,350,000 in 2021 for the mining site and spent an additional $670,000 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.) Probability 1 25% Cash Outflow $370,000 470,000 670,000 45% 30% To aid extraction, Jackpot purchased some new equipment on July 1, 2021, for $190,000. 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

Answer:

1. Compute the cost of the copper mine as shown below:

Cost of the copper mine = Acquisition cost + Extraction + Restoration cost
=$1,350,000+$670,000+[$344,920(note 1)]
=$2,364,920
Thus the cost of the copper mine is $2,364,920

Note-1
Calculate the restoration cost as shown below:

	Cash outflow	x	Probability	=	Probable Cash Outflow
1	$370,000	x	25%	=	$92,500
2	$470,000	x	45%	=	$211,500
3	$670,000	x	30%	=	$201,000
Total Probable Cash Outflow				=	$505,000
Present value factor @ 10% during the end of 4th year				=	0.68301
Restoration Cost					$344,920

Thus the restoration cost of the copper mine is $344,920

2. Prepare the journal entry to record the application costs of the mine as shown below:

General Journal
Date	Account Titles and Explanation	Debit ($)	Credit ($)
2021	Copper mine	$2,364,920
	Cash [$1,350,000+$670,000]		$2,020,000
	Asset retirement liability		$344,920
	(To record the acquisition of copper mine)
01/07/2021	Equipment	$190,000
	Cash		$190,000
	(To record the purchase of new equipment)