Question

On January 1, 2016, the

Winderl

Mining Co. paid $50 million for a copper mine owned by

the state of Wyoming. To obtain the mine, Winderl agreed to restore the land to a suitable condition

for other uses after its exploration and extraction activities.

The company’s credit-adjusted risk free interest rate is 6%. It estimates the possible cash flows for

restoring the land, three years after its extraction activities begin, as follows:

Cash outflow

Probability

$5 million

40%

$10 million

60%

What journal entry should Winderl make for the initial acquisition of the copper mine?

On December 31, 2016?

On January 1, 2019, assuming that it pays $6,000,000 to restore the land on that date?

Answer 1

Ques 1
Expected value of restoration
5	40%	2
10	60%	6
total		8	million
8000000	*	0.83962	PV factor(i=6%,n=3)		6716960
so cost of mine
payment	50000000
expected value of restoration	6716960
initial cost	56716960
so entry is
accounts	debit	credit
copper mine	56716960
cash		50000000
asset retirement liability		6716960
ques 2
accounts	debit	credit
Accretion expense	403040
asset retirement liability		403040
(6716960*6%)
ques 3
accounts	debit	credit
asset retirement liability	8000000
gain on land restoration		2000000
cash		6000000
explanation
so we have	effective rate
balance	6%	6716960
31-12-16	403040	7120000
31-12-17	427200	7547200
31-12-18	452800	8000000