Exercise 10-4 cost of a natural resource; asset retirement obligation [lo10-1]

jackpot mining company operates a copper mine in central montana. the company paid $1,450,000 in 2018 for the mining site and spent an additional $690,000 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 probability 1 $ 390,000 25 % 2 490,000 45 % 3 690,000 30 % to aid extraction, jackpot purchased some new equipment on july 1, 2018, for $210,000.

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.