Schefter Mining operates a copper mine in Wyoming. Acquisition, exploration, and

Question

Schefter Mining operates a copper mine in Wyoming. Acquisition, exploration, and development costs totaled $7.4 million. Extraction activities began on July 1, 2018. After the copper is extracted in approximately six years, Schefter is obligated to restore the land to its original condition, including constructing a park. The company’s controller has provided the following three cash flow possibilities for the restoration costs:

The company’s credit-adjusted, risk-free rate of interest is 5%, and its fiscal year ends on December 31. (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. Round other intermediate calculations to the nearest whole dollar. Enter your answer in whole dollars.)

Required:
1. What is the initial cost of the copper mine?
2. How much accretion expense will Schefter report in its 2018 income statement?
3. What is the book value of the asset retirement obligation that Schefter will report in its 2018 balance sheet?
4. Assume that actual restoration costs incurred in 2024 totaled $772,000. What amount of gain or loss will Schefter recognize on retirement of the liability? (Loss amount should be indicated by a minus sign.)

1.- Cost of copper mine?____________

2.- Accretion expense? ____________

3.- Book Value? ______________

4.- Gain or loss? Amount?_____

Cash Flow Probability 1. $ 620,000 30 % 2. 720,000 25 % 3. 820,000 45 %

Explanation / Answer

Calculation of Weighted Restoration Cost:

Present value of $1,n=6,i=5% is 0.74622 (seen from table)

PV of Weighted Restoration Cost = 735,000 x 0.74622 = $548,471.7

a. Initial Cost Of Copper Mine -

Acqisition, exploration and development cost- $7,400,000 + PV of Weighted Restoration Cost ( $548,471.1)

Total: $7,948,471.1 That is the Initial Cost of copper mine.

b. Accretion Expense in 2018 Income Statement: since extraction work started in july-

$548,471.1 x 5% x 1/2year = $13,711.78

C. Book Value of The Assets Retirement Obligation: $548,471.1 + $13,711.78 = $562,182.88

d. Loss on retirement of Liability = $772,000 - 735,000 = $37,000

Restoration Cost($) Probabiltiy Weighted Cost($) 620,000 30% 186,000 720,000 25% 180,000 820,000 45% 369,000 Total 735,000

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