Cost of a natural resource; asset retirement obligation
Response to the following problem:
Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,000,000 in 2016 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:
|
|
Cash Outflow
|
Probability
|
|
1
|
$300,000
|
25%
|
|
2
|
400,000
|
40%
|
|
3
|
600,000
|
35%
|
To aid extraction, Jackpot purchased some new equipment on July 1, 2016, 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.