Jackpot Mining Company operates a copper mine in central
Montana. The company paid $1,850,000 in 2021 for the mining site
and spent an additional $770,000 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 | $ | 470,000 | 25 | % | ||
| 2 | 570,000 | 40 | % | |||
| 3 | 770,000 | 35 | % | |||
To aid extraction, Jackpot purchased some new equipment on July 1,
2021, for $290,000. 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.
| Computation of Cost of Copper Mine | |
| Mining Site | $1,850,000.00 |
| Devlopment cost | $770,000.00 |
|
Restoration Cost (470000*25%+570000*40%+770000*35%)X 0.68301 |
$420,051.15 |
| Tototal cost | $3,040,051.15 |
| Part-2 Journal Entry | |||
| Event | Account Tittle | Debit | Credit |
| 1 | Copper Mine | $3,040,051 | |
| Cash (1850000+770000) | $2,620,000 | ||
| Asset Retirement Liability (bal) | $420,051 | ||
| 2 | Equipment | $290,000 | |
| Cash | $290,000 |
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