Jackpot Mining Company operates a copper mine in central Montana. The company pa
ID: 2565341 • Letter: J
Question
Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,000,000 in 2018 for the mining site and spent an additional $600,000 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.)
To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $120,000. After the copper is removed from this mine, the equipment will be sold. The credit-adjusted, risk-free rate of interest is 10%.
Required:
1. Determine the cost of the copper mine.
2. Prepare the journal entries to record the acquisition costs of the mine and the purchase of equipment.
Explanation / Answer
Answer 1)
Woking note : Determination of Assets Retirement Liability -ie Restoration costs
= [ ( Cash out flow * Probability)] * PVIF 10% , 4 years
= ($ 300,000 * 25 % + $400,000 *40% + $ 600,000*35%) *0.6830 = $303,935
Determine the cost of the copper mine =
Cost paid for mining site + Additional development cost + Restoration cost
= $1,000,000 + $600,000 + $303,935 (woking note) = $1,903,935
Answer b
Journal Entries
Date Description Debit ($) Credit($) 2018 Copper Mine 1,903,935 Cash 1,600,000 Assets Retirement Liability (Working Note) 303,935 To record acquisition costs of the mine July 1 , 2018 Equipment 120,000 Cash 120,000 To record purchase of equipmentRelated Questions
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