Jackpot Mining Company operates a copper mine in central Montana. The company pa
ID: 2330602 • Letter: J
Question
Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,250,000 in 2018 for the mining site and spent an additional $650,000 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 $170,000. 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
Requirement-1, The Cost of copper mine.
Amount paid for mining site = $12,50,000
Amount paid for prepare the mine for extraction of the copper = $650,000
Net Expected Cash outflow = [$350,000 x 25%] + [$450,000 x 40%] + [$650,000 x 35%] = $495,000
Present Value of Net cash Outflow = Cash Flow x [PVIF 10%, 4 Years]
= $495,000 x 0.68301
= $ 3,38,092
Therefore, The Cost of copper mine
= $12,50,000 + 650,000 + 338,092
= $ 22,38,092
Requirement-2, The journal entries to record the acquisition costs of the mine and the purchase of equipment.
Accounts Tittles and Explanations
Debit ($)
Credit ($)
1
Copper Mine A/c
22,38,092
To Cash A/c
19,00,000
To Asset Retirement Liability A/c
3,38,092
[Record of Cost of copper mine]
2
Equipment A/c
170,000
To Cash A/c
170,000
[Purchase of some new equipment on July 1, 2018, for $170,000]
Accounts Tittles and Explanations
Debit ($)
Credit ($)
1
Copper Mine A/c
22,38,092
To Cash A/c
19,00,000
To Asset Retirement Liability A/c
3,38,092
[Record of Cost of copper mine]
2
Equipment A/c
170,000
To Cash A/c
170,000
[Purchase of some new equipment on July 1, 2018, for $170,000]
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