Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $2,000,000 in 2021 for the mining site and spent an additional $800,000 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 $ 500,000 25 % 2 600,000 40 % 3 800,000 35 % To aid extraction, Jackpot purchased some new equipment on July 1, 2021, for $320,000. 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

Answer:

1) total cost $3,209,909

journal entries:

copper deposit    3,209,909 debit

       cash                          2,800,000 credit

       restoration liability       409,909 credit

Explanation:

mine deposit: 2,000,000 land

                    +    800,000 extraction

                     +   409,909 restoration cost

                       3,209,909‬  total cost

expected monetary value of the restoration cost:

$\left[\begin{array}{cccc} Electrical&Return&Probability&Weight\\ One&500,000&0.25&125,000\\ Second&600,000&0.4&240,000\\ Third&800,000&0.35&280,000\\ Total&&1&645,000\\\end{array}\right]$

preset value of restoration cost:

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  $645,000.00

time  4.00

rate  0.12000

$\frac{645000}{(1 + 0.12)^{4} } = PV$  

PV   409,909.1606