Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,600,000 in 2018 for the mining site and spent an additional $720,000 to prepare the mine for extraction of the copper. After the copper is extracted in approximately 4 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 $ 420,000 25 % 2 520,000 45 % 3 720,000 30 % To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $240,000. After the copper is removed from this mine, the equipment will be sold. The credit-adjusted, risk-free rate of interest is 12%.

Determine the cost of the copper mine.

Prepare the journal entries to record the acquisition costs of the mine and the purchase of equipment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Round your answers to the nearest whole dollars.)

record the purchase of the equipment

Answer 1

Cost of copper mine = $2,672,713

Explanation:-

Mining site =$16,00,000

Development cost = $720,000

Restoration cost = $352,713

=2,672,713

420,000 × 25% = $105,000

520,000 × 45% = $234,000

720,000 × 30% = $216,000

= $5,55,000 × 0.635518 = $352,713

Present value of $1,n=4,i=12%

Cash = $16,00,000 + $720,000 =$23,20,000

Event	General journal	Debit	Credit
1	copper mine	$2,672,713
	Cash		$23,20,000
	Asset retirement liability		$352,713
2	equipment	$240,000
	Cash		$240,000