Jackpot Mining Company operates a copper mine in central Montana. The company pa
ID: 2509642 • Letter: J
Question
Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,200,000 in 2018 for the mining site and spent an additional $640,000 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.) Cash Outflow $340,000 440,000 640,000 Probability 15% 45% 40% 1 To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $160,000. 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. Complete this question by entering your answers in the tabs below Required 1Required 2 Determine the cost of the copper mine. (Do not round intermediate calculations. Round your answer to the nearest whole dollar.) Cost of copper mine Required 1 Required 2Explanation / Answer
Note : Present value of Restoration costs = (Outflows * Probability) * PVIF (10 % , 4 years)
= [ ($340,000 * 15 %) + ($440,000 * 45 %) + ($640,000 * 40 %) ] * 0.68301
= ($51,000 + $198,000 + $256,000) * 0.68301 = $344,920
**Kindly note as factor table applicable for the question is not paseted here , thus i had taken PV factor value upto 5 decimal places. It is recommended to cross verify with the factor table given in the question.
Answer 1
Cost of copper mine = Purchase cost of copper mine + Development cost + Restoration costs
= $1,200,000 + $640,000 + $344,920 = $2,184,920
Answer 2
Journal Entries
Date Accounts Titles & Explanation Debit ($) Credit ($) 2018 Copper mine 2,184,920 Cash ($1,200,000 + $640,000) 1,840,000 Asset retirement liability 344,920 ( To record purchase of copper mine) July 1 , 2018 Equipment 160,000 Cash 160,000 ( To record purchase of equipment)Related Questions
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