Jackpot Mining Company operates a copper mine in central Montana. The company pa
ID: 2549633 • Letter: J
Question
Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,850,000 in 2018 for the mining site and spent an additional $770,000 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.):
To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $290,000. After the copper is removed from this mine, the equipment will be sold. The credit-adjusted, risk-free rate of interest is 10%.
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.
Explanation / Answer
1. COST OF COPPER MINE CALCULATION = $ 30,40,051
Mining site $ 18,50,000
Extraction Cost $ 7,70,000
Restoration costs $ 4,20,051
$ 30,40,051
Restoration costs calculation
$ 470000 × 25% = 117500
$ 570000 × 40% = 228000
$ 770000 × 35% = 269500
Total = $ 615000
Present Value = $ 615000 × 0.68301
= $ 4,20,051
*Present value of $1, n = 4, i = 10% (from PV of $1)
2.Journal entries to record the acquisition costs of the mine and the purchase of equipment.
1.Copper mine A/c Dr $ 30,40,051
To Cash A/c Cr $ 26,20,000
To Asset retirement liability A/c Cr $ 4,20,051
2 .Equipment A/c Dr $ 2,90,000
To Cash A/c Cr $ 2,90,000
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