Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,800,000 in 2021 for the mining site and spent an additional $760,000 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	$	460,000			25	%
2		560,000			40	%
3		760,000			35	%

To aid extraction, Jackpot purchased some new equipment on July 1, 2021, for $280,000. After the copper is removed from this mine, the equipment will be sold. The credit-adjusted, risk-free rate of interest is 12%.

Required:
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

SOLUTION

1.

S.No.	Cash flow (A)	Probability (B)	Total (A*B)
1.	460,000	25%	115,000
2.	560,000	40%	224,000
3.	760,000	35%	266,000
	Total		605,000
	Present value of $1, n=4, i=12%		0.63552
	Restoration cost		384,490

Cost of copper mine-

Particulars	Amount ($)
Mining site	1,800,000
Development costs	760,000
Restoration cost	384,490
Cost of copper mine	2,944,490

2.

S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
a.	Copper mine	2,944,490
	Cash (1,800,000+760,000)		2,560,000
	Asset retirement liability		384,490
	(To record the acquisition costs of the mine)
b.	Equipment	280,000
	Cash		280,000
	(To record the purchase of equipment.)