Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,300,000 in 2021 for the mining site and spent an additional $660,000 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:
Cash Outflow Probability
1 $360,000 20%
2 460,000 45%
3 660,000 35%

To aid extraction. Jackpot purchased some new equipment on July 1, 2021, for $180,000. After the copper Is removed from this mine, the equipment will sold. The credit-adjusted. risk-free rate of interest is 12%.

Required:
a. Determine the cost Of the copper mine.
b. Prepare the Journal entries to record the acquisition costs of the mine and the purchase of equipment.

Answer 1

Answer and Explanation:

The computation is shown below;

a. The Cost of Copper Mine is  

Mining Site $1,300,000

Development Cost $660,000

Restoration Cost $324,115

Cost of Copper Mine $2,284,115

working note

Restoration Cost    

$360,000 × 20% =  $72,000

$ 4,60,000 × 45% = $207,000

$ 6,60,000 × 35% = $231,000

Total $510,000

Present Value of Restoration Cost = $3,24,115

($510000 × 0.63552)    

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

b. The journal entries are given below:

1 Copper mine $2,284,115  ($1300,000 + $6,60,000)  

      To Cash  $1,960,000  

      To Assets retirement liability  $324,115  

(Being acquisition of mine recorded)    

2 Equipment $180,000  

       To Cash $180,000  

(Being Equipment purchased recorded)