Jackpot Mining Company operates a copper mine in central Montana. The company pa
ID: 2528375 • Letter: J
Question
Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,650,000 in 2018 for the mining site and spent an additional $730,000 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 $250,000. After the copper is removed from this mine, the equipment will be sold. The credit-adjusted, risk-free rate of interest is 12%.
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. Determine the cost of the copper mine.
= $16,50 000 (Mining site) + $730000 (Development costs) + $3,77,825 (Restoration costs)
= $27,57,825
cost of the copper mine = $27,57,825
***Restoration costs
= [($430000x15%)+($530000x45%)+($730000x40%) ] x 0.635 (PVF12%,4Year)
= $3,77,825
2. Prepare the journal entries to record the acquisition costs of the mine and the purchase of equipment.
Dr Copper mine A/c $27,57,825
Cr Cash A/c $23,80,000
Cr Asset retirement liability A/c $3,77,825
Dr Equipment A/c $2,50,000
Cr Cash A/c $2,50,000
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