Smithson Mining operates a silver mine in Nevada. Acquisition,
exploration, and development costs totaled $6.8 million. After the
silver is extracted in approximately five years, Smithson is
obligated to restore the land to its original condition, including
constructing a wildlife preserve. The company’s controller has
provided the following three cash flow possibilities for the
restoration costs: (1) $620,000, 15% probability; (2) $670,000, 45%
probability; and (3) $770,000, 40% probability. The company’s
credit-adjusted, risk-free rate of interest is 8%. (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.)
What is the book value of the asset retirement liability at the end
of one year?
Assuming that the actual restoration costs incurred after
extraction is completed are $716,000, what amount of gain or loss
will Smithson recognize on retirement of the liability?
(Do not round intermediate calculations. Enter your answer
in whole dollars.)
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